COMPETITION LAW PROJECT

ABUSE OF DOMINANCE

SUBMITTED TO – ANKITA BANERJEE

BY- HIRANYAM BATHLA 5185

BA.LLB (H)

SEM – 6TH

SEC - A
What is Dominance?
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” .

 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

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” .
  QqA 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)
 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

 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

 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

 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
  Another helpful categorisation is price and non-price 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

 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)

 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

 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
Potential competitors (1)
 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

Buyer Power

 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.

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

Price Abuses
 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

 ‘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.

Penalties
  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

 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.

Conclusion
It can now be concluded that the competition Act, 2002 is landmark legislation.
The main aim of this Act is to promote competition and curb all anti-competitive
agreements. This Act restricts the abuses of dominant enterprises. It can also
regulate any kind of combinations beyond a particular size. Thus this Act does not
curb monopolies rather it curbs abuses of monopolies.

Thus, the competition Act play a responsible role in changing the control
mechanism related to monopoly and restrictive trade practices and is also expected
to protect the interest of the small and medium industries in the country besides
giving consumers more powers to redress their grievances.