Rationale
Article 102 of the European Union Treaty prohibits the abuse of a dominant position within the European Union, insofar as it may affect trade between member states. The corresponding domestic legislation focuses on abuse of dominant position within the State. The prohibition applies to actions by “undertakings” which include individuals and corporations which undertake commercial activity.
Fair competition is the fundamental part of the European Union single market. Parties with significant market power may distort competition. They may divide up markets within the EU to the prejudice of the internal market. The prohibition on the abuse of a dominant position seeks to prevent serious distortion of the operation of the market by entities with monopolistic or almost monopolistic power, such that there is an absence or impairment of effective competition.
An entity with excessive market power may restrict output and increase prices. It may seek to prevent others from entering the market by discounting in order to drive out potential competitors. It may try to link its supply of products with other products.
Holding a dominant position in itself is not an abuse under the legislation. There must be abuse in order for the prohibition to apply. There is separate legislation on mergers and acquisitions which is relevant to the accumulation of market powers by reason of a merger or acquisition.
The EU Commission has significant power to apply sanctions where it finds that there has been an abuse of a dominant position. It may impose fines up to 10 per cent of turnover worldwide. The EU Commission completed a review of its powers of sanction in February 2009, which sets out the methods by which the Commission uses its powers proceeds in investigations. The Commission is ultimately an administrative body and the interpretation of completion law is ultimately one for the courts of the European Union. However, the guidance is practical assistance.
Undertakings
Undertakings comprise all entities carrying out any kind of commercial activity. It is not necessary that they be for-profit purposes. It has been held that certain public officials are carrying out quasi-commercial functions, can be undertakings for this purpose. The European Court has held bodies which provide statutory health services as an exclusively social objective are not engaged in the commercial or economic activity and accordingly are not to undertakings. Where, however, the health bodies are market-based or have been privatised, they may be undertakings for the purpose of competition law.
Undertakings may comprise a group. They may comprise separate linked companies which are a single entity for the purpose of economic activity. This is the economic entity principle. The principle looks at the economic and management reality of the companies or entities in terms in order to determine whether they constitute an ”undertaking” collectively. The consequence may be that one group entity is responsible for another’s contravention of competition law.
Inter State Trade
The EU prohibition applies where there is an effect on trade between states. Below this level both the Republic of Ireland and UK competition law have an equivalent test for abuse of a dominant position within the State which has no inter-effects.
Where there is an effect on interstate competition, national courts and their public authorities must themselves apply the EU prohibition. Domestic law may provide for higher standards in relation to the test for “abuse” of a dominant position. Actions may have an effect in interstate trade, if it is possible to foresee with a sufficient degree of possibility, on an objective basis, that the agreement may have an influence, direct or indirect, actual or potential, on the pattern of trade between states. This is a broad test and could potentially apply to anything that effects patterns of trade between states.
Under the structural test, there may be an effect on inter-state trade, where there is a change in the structure of competition in the market occurs. This may be so even if the undertaking is dominant in one state only, on the basis that the change in structure may lead to the division of the single market.
Dominance and the Relevant Market
Economic analysis is necessary to order to consider whether there is a dominant position. The relevant market must be defined. There must be significant market power. The existence of barriers to entry is relevant. Dominance will be relative to a particular market. The issue market definition can be difficult. Markets may relate to particular products, locations or periods of time. The EU Commission has published a notice on the definition of a market. This sets out the Commission’s practice in relation to its decision-making process in this context.
The primary consideration in defining the market is to consider the range of products in competition with those of the undertaking concerned. The competitors may be actual or potential. If the product market is defined too narrowly, then an entity may be deemed dominant. However, in a more broadly defined market, it may not be dominant.
The interchangeability or the ability for substitution of the product with a competing product is a key factor. The Commission focuses on the level of demand substitution and the ease at which customers may switch from one product to the other. The Commission applies “the small but significant non-transitory increase in price” test. This applies a hypothetical permanent increase of the price of the order of 5 to 10 per cent. If there is evidence that this would cause a switch to other products in consequence of such an increase, the product concerned and the substituted product are likely to be deemed to be part of the same market. The test is applied using an increasing set of competing products until no further substitutes are found in accordance with the test.
If one single undertaking produced all the products for which there was no substitute in the above sense, there would be a hypothetical monopoly. The Commission cannot act on the basis of hypothesis only. It must have evidence. Evidence may be by way of market studies and the views of market participants. It would be difficult in practice, in smaller markets to gather sufficient evidence.
Defining the Product Market I
In principle, there is always likely to be a limit to which any monopolistic provider can increase its prices, without incurring some manner of substitution. In practice, there is likely to be a limit to increases, so as this would otherwise cause a reduction in profits. A wider range of products will act as substitutes at a higher price.
If the monopolistic provider has already, as may commonly be the case, raised its price to this level, then a further 5 to 10 per cent increase might cause substitution and give the illusion that there is competition. The Commission is cognisant of this possibility and will look at the entirety of the evidence to order to gauge whether this is occurring.
The European Court of Justice follows the Commission’s approach, in broad terms. The court is nonetheless free to interpret the provisions of the Treaty and regulations in accordance with the law, as it sees fit. The court has traditionally focused on a substitution/interchangeability test. It considers cross elasticity of demands. Cross elasticity is an economic concept referable to the extent to which changes in price, effect changes in demand. The more elastic demand is at that the price, the more changeable it is with referable to price.
Where cross elasticity is high, relatively small changes in price will have a significant effect by way of substitution of demand by the public. In contrast, if demand is inelastic at the particular price, a significant relatively high price increase will not necessarily cause a significant amount of substitution. The substitutability of products may be considered with reference to their objective characteristic. The more similar in nature the products and the more similar the functions they perform, the more likely they are to act as substitutes.
The facts that products are similar does not necessarily mean that they are part of the same market, for the purpose of competition law. Famously the market in bananas was regarded by the courts as separate to the market in fresh fruit generally. Because bananas were available year-round and satisfied the particular needs of young, old persons and sick persons, they were accepted as being sufficiently differentiated from other fresh fruits.
Defining the Product Market I
Questions of judgment may arise in considering whether products are in the same market. Some products, which appear to be quite distinct, may perform the same functions so that they are sufficiently interchangeable, notwithstanding their difference in nature.
The price range of goods and services may affect the judgment of what constitutes the relevant market. There may be a luxury end goods, which are distinct from the general market.
Products may have multiple uses. There may be different markets relative to each type of use. The ECJ has held that the market in respect of car tyres differs depending on the type of demand. The original tyres fitted to vehicles during manufacturing and replacement tyres during repairs were regarded as being in separate markets. There was found to be a significant difference in the circumstances and strength of the market power of the purchasers in each case. In the former case, tyres were likely to be ordered in bulk with greater quantities, whereas in the latter case, they were likely to be ordered as required.
The supply side may be relevant. If other suppliers and producers can switch production to substitutes which can enter the relevant market at short notice and without significant cost, they may be part of the market. This potential competition may make a market more competitive. The Commission has given the example of the paper market, where e different types of paper are produced, but where other producers could relatively easily enter the market, by producing that different type of paper.
The geographical market must be considered. It will define the area in which conditions of competition apply between products. There are cultural, practical and legal reasons why products may only compete within a certain area. The court considers the geographical market to be the area where objective reasons based on the above criteria apply to all products and traders. Where radically different circumstances apply in other markets, they may not be part of the same geographic market.
Transport costs may be a significant feature. Perishable goods or goods that are expensive to transport will be subject to a more limited market. Some particular markets may be seasonal or temporary.
Contact McMahon Legal