European Competition Law - Area Sistemi Informativi - …host.uniroma3.it/facolta/economia/db/materiali/...whole or as a number of separate products is illustrated by Hugin (1979)

European Competition Law

Prof. Fabio Bassan

a.a. 2015‐16

Article 102 TFEU Article 102 TFEU provides:

Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market insofar as it may affect trade between Member States. Such abuse may, in particular, consist in:

Article 102 TFEU (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.

Article 102 TFEU

- Any abuse - by one or more undertakings - of a dominant position - within the internal market or - in a substantial part of it - shall be prohibited as incompatible with the

internal market - insofar as it may affect trade between Member

States

Article 102 TFEU Dominant position:

The ECJ has defined dominance in terms of an undertaking’s ‘economic strenght’ and its ability to act independently on the market. United Brands (1978): ECJ: The dominant position relates to a position of economic strenght enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimatle of its consumers

Article 102 TFEU Dominant position: Hoffmann-La Roche (1979): ECJ

The dominant position relates to a position of economic strenght 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, of its customers and ultimately of its consumers. Such a position does not preclude some competition, which it does where there is a monopoly or quasi-monopoly, but enables the undertaking which profits by it, if not to determine, at least to have an appreciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.

Article 102 TFEU

Dominant position: Problems with the definition: - Concept of independence; wider and more nebulous

than power over price -  the independence has to exist only ‘to an appreciable

extent’ and is competing with continuing competition on the market

-  The reference both to the ability of an undertaking to impede effective competition (the power to exclude competitors) and to behave independently, are different tests or part of the same test?

Article 102 TFEU Dominant position

Assessing dominance: Continental can (1973) ECJ: the dominance exists only in relation to a particular market and not in the abstract. Two-stage procedure, by first identifying the relevant market and secondly examining the undertaking’s position on that market and analysing the competitive constraints which the undertaking faces.

Article 102 TFEU

Dominant position Assessing dominance relevant market - the product market - the geographic market

Article 102 TFEU Dominant position/Assessing dominance/relevant market/ -  the product market

-  Demand substitution United Brands (1978):

ECJ had to consider why people eat bananas and whether or not they are treated by consumers as reasonably interchangeable with other kinds of fresh fruit. It decided that there was only a small degree of substitutability between bananas ond other fruits, partly because of the unique appearance, taste, softness, seedlessness, and easy handling of the banana. The judgement does not make it clear why these distinctive characteristics should impact on the determination of the product market.

Article 102 TFEU Dominant position/Assessing dominance/relevant market/the product

market/Demand substitution Michelin (1983): tyre market, or the (narrower) market for new

replacement tyres for lorries, buses, and similar vehicles? Many fact to be considered: - lorries and buses need larger tyres than cars and vans; - there are different sizes of lorry and bus tyres; - tyre manufactures supply their tyres separately to new lorry and bus manufactures and to dealers who fit tyres on lorries and buses as replacements; Which, if any of these tyres were substitues for each other so that they formed part of the same product market?


market/Demand substitution France Télécom (2007): the relevant market is the French market for high-speed internet access for residential customers. The difference between high and low speed internet is clearly perceived by consumers. The analysis on price differences shows that consumers are prepared to pay a premium for the extra performance and covenience of high speed.


market/the structure of supply and demand Michelin I (1983): “for the purpose of investigating the possibly dominant

position of an undertaking on a given market, the possibilities of competition must be judged in the context of the market comprising the totality of the products which, with respect to their characteristics, are particularly suitable for satisfying constant needs and are only to a limited extent interchangeable with other products. However, it must be noted that the determination of the relevant market is useful in assessing whether the undertaking concerned is in a position to prevent effective competiton from being maintained and behave to an appreciate extent independently of its competitors and customers and consumers. For this purpose, therefore, an examination limited to the objective characteristics only of the relevant products cannot be sufficient: the competitive conditions and the structure of supply and demand on the market must also be taken in consideration”.


market/the structure of supply and demand/primary and secondary markets (aftermarkets)

-  The question of whether a product is to be considered a single whole or as a number of separate products is illustrated by Hugin (1979).

-  Hugin was a swedish firm which produced and sold cash register and their spare parts. It had the 12% of the cash register Community market.

-  When Hugin refused to keep on selling spare parts of its cash register to Liptons (a small distributor) the ECJ found that spare parts constituted a separate market from cash registers.

-  ECJ applied the same reasoning in Volvo (1988), Renault (1988), Hilti (1988).


market/the structure of supply and demand/primary and secondary markets (aftermarkets)-derivative markets

-  Commercial solvens (1974): a raw material aminobutanol, constituted a product market of its own.

-  It was the first case to deal with the problems posed by derivative or ancillary markets. Such markets can be distinguished from those for the primary product.

-  Question: whether there can be a market in an ‘input’ which the producer of the ‘input’ does not offer for sale but uses only for its own purposes.

Article 102 TFEU -  Answers:

-  In Magill (1995) the ECJ upheld the Commission’s definition of a market in ‘television listing’ although the broadcasting companies did not sell them for publication.

-  In Bronner (1998) the ECJ accepted that there could be a market for the home delivery of newspapers even though the undertaking concerned had developed it only to distribute its own newspapers.

-  In IMS (2001) the ECJ said that could be a potential market in ‘inputs’ which a monopolist decided not to market independently (a system for representing pharmaceutical sales data over which the undertaking claimed copyright).


market/Supply substitution •  Continental can (1973):

–  The ECJ held that the market must be defined from the supply side as well as the demand side. In that case the Commission found three separate markets consisting of different types of metal containers for food pakaging. The ECJ held that the Commission had not explained why these products were in separate markets and were not all part of a larger light metal container market.

–  Other supply-side substitution analyses: •  Michelin (1983): there was no elasticity of supply between tyres for heavy

vehicles and car tyres owing to significant differences in production techniques;

•  Tetra Pack I: there was no supply-side substitution, because manufactures of other types of milk-packaging machinery were not able to produce such pachaking.

Article 102 TFEU Dominant position: geographic market -  If the company operates all over Europe, the (european market) is

restricted by: -  Legal regulations

-  British telecommunications (1983)

- Barriers to trade - high transport costs - language - marketing - consumers preference

- The market may be confined to a number of member states, to a single member state, to a part of a member state.

Article 102 TFEU Dominant position: geographic market/cases •  Nestlé/Perrier (1983) : the Commission found that the relevant

geographic market for mineral water was limited to France. Irrespective of European integration, French consumers continued to choose local products.

•  British Midland v. Aer Lingus: the Commission defined as a separate market the air route between Dublin and Heathrow

•  Michelin (1983): is the most criticized geographic market: the ECJ upheld the Commission’s finding that there was a separate market for heavy vehicle new replacement tyres in the Netherlands.

•  Alsatel/Novasam (1988): the ECJ did not accept that a particular region of France, rather than the country as a whole, was the geographic market for telephone installations

Article 102 TFEU •  Dominant position: geographic market/cases •  Michelin (2001): The company claimed that the market was no

longer national. The Commission rejected this claims, on the those grounds: what matters is to assess the real capacity of dealers to obtain supplies from outside their national territory and the similarities or differences in the supply structure.

•  In Michelin the Commission found that: –  the large manufactures still organized their distribution and sales along

national lines; –  There were considerable differences in the large manufacturers’ market

share from country to country, that is hardly compatible with a European market with homogeneous competition

–  There were appreciable price differences from country to country.

Article 102 TFEU •  Dominant position: assessing market power

- the assessment of dominance will take in account the competitive structure of the market and in particular: - the market position of the dominant undertaking and its

competitors (i.e. current market shares)

- constraints imposed by credible threats of expansion or entry (barriers to expansion or entry) and

- countervailing buyer power

Article 102 TFEU •  Dominant position: assessing market power: market shares

–  It referes to the present state of the market –  It is a relative element (not absolute): it depends

•  on competitors’ market share •  on barriers to entry

(i)  High market shares and the presumption of dominance: the higher the market share, the more likely a finding of dominance Hoffmann-La Roche (1979): the ECJ although recognizing that the significance of market shares may vary from market to market, and acknowledging the relevance of other factors, held that “very large shares” are in themselves indicative of dominance unless there are ‘exceptional circumnstances’

Article 102 TFEU •  Dominant position: assessing market power: market shares •  In Hilti (1994) and Tetra Pak II (1996) citing Hoffmann La Roche,

the ECJ held that market shares respectively of 70-80% and 90% were themselves evidence of a dominant position. But barrier to entry were very high.

•  In AKZO (1991) a 50% share of the market was considered giving

dominance: with the 50% of the market there is a presumption of dominance

Article 102 TFEU •  Dominant position: assessing market power: market shares •  Market shares as a relative factor: Hoffmann La Roche: the

relationship between the market shares of the undertaking concerned and of its competitors, especially those of the next largest, was a relevant factor. –  The market power of an undertaking with a market share of 51% will be

considerably different depending on whether it simply has one competitor with the 49% of the market, or three competitors which have 16, 16, and 17% of the market, respectively, or 49 competitors with 1% each.

–  Hoffmann La Roche: 45% of the market gives a company dominance when it is twice as large as its competitor.

–  Michelin: 57%= dominance: the remainder was fragmented.

Article 102 TFEU •  Dominant position: assessing market power: market shares

(ii) Low market shares and dominance Below 40/50% of market share dominance is unlikely but possible.

The lowest share at which an undertaking has been considered dominant has been 39.7% (British Airways, 2003).

Article 102 TFEU •  Dominant position: assessing market power: other factors

–  Indications from the undertaking itself •  Its own assessment of its position (i.e.: AKZO regarded itslef as the

world leader in the peroxides market) •  Profits (if the undertaking is earning monopoly profits) •  Performance indicators (ie the ability of an undertaking to obtain

premium prices) •  Overall size and strenght of range of products (portfolio power)

Article 102 TFEU •  Dominant position: assessing market power: barriers to

entry and expansion –  constraints imposed on an undertaking by credible threats of

future entry or expansion. When there are barriers, competitors can not enter or expand on the market and change the existing market share situation

–  United Brands (1978), Hoffmann La Roche (1979), Michelin (1983)

Article 102 TFEU •  Dominant position: assessing market power: other factors

indicating dominance –  Statutary monopoly, legal regulation, intellectual property rights –  Superior technology –  Established distribution and sales networks –  Vertical integration –  Economies of scale and scope –  Access to financial resources and the need for investment –  Access to key imputs –  Advertising, reputation, product differentiation

Article 102 TFEU •  Dominant position: assessing market power: (iii) countervailing

buyer power •  Dominance is defined as the independence of an undertaking from

(inter alia) its customers. Hence, an undertaking constrained by a powerful buyer is not in a dominant position.

•  In order to meet this condition the buyer should be able to protect the market itself by defeating any price increase. This is possible when the buying side is highly concentrated.

Article 102 TFEU •  Dominant positions in the new economy •  Competition on the new economy tends to be on innovation. •  Dominant positions are often temporary and fragile. •  Hence, in dynamically competitive markets in the new economy the

immediate competitive constraints are far less important than the potential competition.

•  Some ‘new economy markets’ have a ‘network effect’ (network externalities). The more users a network has, the more valuable it becomes to an individual user. Once a network has a certain number of users, the market may ‘tip’ towards that network.

Article 102 TFEU •  Network effect: Microsoft (2007):

–  “In industries exhibiting strong network effects, consumer demand depends critically on expectations about future purchases. If consumers expect a firm with a strong reputation in the current (product) generation to succeed in the next generation, this will tend to be self-fulfilling as the consumers direct their purchases to the product that they believe will yield the greatest networks gains”.

Article 102 TFEU Conduct which can be an abuse The meaning of abuse

Article 102 does not forbid the holding of a dominant position per se but only an abuse of it. List:

(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.

Article 102 TFEU Exploitative and exclusionary abuses. Reprisal abuses

Three ways of describing abuses:

a) exploitative abuse: conduct whereby the dominant undertaking takes advantage of its market power to exploit its customers

b) exclusionary abuse: conduct whereby it prevents or hinders competition on the market

c) reprisal abuse: it is specifically aimed at another undertaking and encompasses steps taken to discipline or punish that other

Article 102 TFEU Exploitative and exclusionary abuses -  Continental can (1973): 3 principles

-  Article 102 did not set out an exhaustive list of prohibited conduct. But it could be an exhaustive list of CATEGORIES of abuse: it is only that the types of conduct WITHIN those categories that are not listed exclusively. (It covers such a wide range of conduct that it is difficult to see what is not encompassed).

-  The conduct which excludes competitors, strenghtens the dominant position and weaken competition was prohibited irrespective of the fact that the dominant undertaking had not exploited or otherwise used its market power in concluding the transaction.

-  Art. 102 should be interpreted in the light of art. 3(f) of the Treaty (a system ensuring that competition in the market is not distorted) and art. 2 (promoting harmonious development of economic activities).

Article 102 TFEU Exploitative and exclusionary abuses •  The broad nature of the concept of abuse

–  The definition of abuse (exclusionary, mostly)

•  Hoffmann – La Roche (1979): “The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened, and which, through recourse to methods different from those which condition normal competition in product or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that completion”.

Article 102 TFEU Exploitative and exclusionary abuses •  The market power does not need to be used for an abuse to be

committed –  Continental can (1973): the dominant undertaking does not need to be

using its dominance to commit the abuse. It is the fact that the undertaking is dominant that renders its behaviour abusive.

•  A dominant undertaking has a special responsibility.

–  Michelin (1983): “a finding that an undertaking has a dominant position is not in itself a recrimination but simply means that, irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market”.


committed –  The dominant undertaking’s special responsibility increases with

its degree of dominance. •  Tetra Pak II (1997): the actual scope of the special responsibility

imposed on an undertaking in dominant position must be considered in the light of the specific circumstances of the case (a quasi monopoly).

•  Compagnie Maritime Belge (2000): particularly onerous special responsibility upon undertakings enjoying a position of dominance approaching a monopoly.

It leads to the super-dominance concept. Criticized, beacuse it has no economic basis


committed

–  Abuse as an objective concept •  Hoffmann La Roche: a dominant undertaking conduct can be abusive

irrespective of the undertaking’s subjective intent to exclude competitors or weaken competition.

–  If the object pursued by the conduct of a dominant undertaking

is to limit competition, that conduct would also be liable to have such an effect.

Article 102 TFEU •  Exploitative and exclusionary abuses •  Objective justifications

–  Protecting the undertaking’s own commercial interests: the ‘meeting competition defence’

•  United Brands (1978): Article 102 does not prevent an undertaking from protecting its own commercial interests when they are attacked.

•  But it does not apply if the undertaking’s actual purpose is to strenghten this dominant position and abuse it.

•  And the undertaking’s response must be proportionate and reasonable. –  Legimitate public interest objectives (health and safety) –  Efficiences (if efficiency gains outweights its detrimental effects).

Article 102 TFEU •  Abuses concerning prices

•  A) price discrimination –  It occurs where the same commodity is sold at different prices to

different customers despite identical costs (or sales at the same price despite dfferent costs).

–  The ability to practice persistent price discrimination is characteristic of a market power.


•  Predatory pricing: it is the practice whereby an undertaking prices its product so low that competitors cannot live with the price and are driven from the market. Once the competitors are excluded from the market the undertaking hopes to increase prices to monopoly levels and recoup its losses.

•  It is anticompetitive because it means low prices in the short term, but the effects are to strenghten the power of the dominant undertaking to the prejudice of consumers.

•  This strategy is possible only if there are serious barriers to entry.

Article 102 TFEU •  Abuses concerning prices •  When prices are predatory?

(1) The Areeda-Turner test (Harvard Law Review) •  A price lower than reasonably anticipated short-run marginal cost (SRMC)

is predatory, whilst a price equal to or higher than reasonably anticipated short-run marginal cost is not predatory.

•  Reasonably anticipated means that a conduct cannot be judged ex post. The marginal cost is judged by what seemed reasonable at the time.

(2) The AKZO test (1991) Prices below average variable costs (AVC) must be regarded as abusive,

because there is no profit-maximizing reason for them. The only explanation is that they are intended to eliminate competitors.

Article 102 TFEU •  Abuses concerning prices •  Margin squeeze: it occurs where a vertically integrated undertaking

dominant in the upstream market for an input sells the input to its downstream competitor at a price which does not allow the competitor to operate profitably. In this case the competitor’s margin (the gap between the cost of the input and the price on the downstream margin) is ‘squeezed’.

•  The leading case on margin squeeze in EU Law is Deutsche Telekom

(2003): DT effected a margin squeeze by charging its competitors on the retail market in Germany a higher price for access to the ‘local loop’ than it was charging its own retail customers.


–  Exclusive purchasing (single branded) contracts •  Exclusive purchasing contracts (also called requirements contracts and,

more recently, single branding or non-compete obligations) are arrangements by which a customer is obliged to obtain all or most of its requirements for the relevant product from one supplier.

•  Hoffmann-La Roche (1979): ‘An undertaking which is in a dominant position on the market and ties purchasers – even if it does so at their request – by an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking abuses its dominant position within the meaning of article 102’.

•  Practices: discount and rebate schemes (quantity [volume] discounts and loyalty rebates

Article 102 TFEU •  Abuses concerning tying and bundling

–  An undertaking

•  supplies a product (the tying product) on condition that the customer obtains something else (the tied product) from the supplier as well,

•  or provides them cheaper if he does; •  or the undertaking only supplies the two things together •  or ensures that the two things only work properly together and do not work at

all or as well with competitors’ product.


•  Tying usually refers to situations where customers that purchase one product (the tying product) are required also to purchase another product from the dominant undertaking (the tied product)

•  Bundling usually refers to the way products are offered and priced by the dominant undertaking. –  Pure bundling: products are only sold together, in fixed proportions –  Mixed bundling: (multi-product rebate, or economic tying): the supplier

offers a financially advantageous deal if the customer buys both products.


–  Microsoft (Commission Decision 2005): •  Microsof had abused of its dominant position on the client pc operating

systems market, where it had over 90% of the market, by supplying Windows to the computer manufacturers with its Windows Media Player(WMP) pre-installed.

•  The basis: the Windows operating system and the WMPwere two distinct products. By bundling them together Microsoft was leveraging its monopoly power into the media player market where it faced more competition.

•  For tying to infringe article 102 four elements must be present: –  1. two separate products –  2. dominance in the tying market –  3. the customers are given no choice to obtain the tying product alone –  4. the tying forecloses competition.

Article 102 TFEU •  Abuses concerning refusals to supply

–  A dominant undertaking infringes article 102 by refusing to supply its products or services or to grant access to its facilities. Constructive refusals, where the offer is such that the supplier knows it is unacceptable, may also infringe.

–  Refusals to supply are normally exclusionary abuses, in that the dominant undertaking’s behaviour denies the other party the tools it needs to compete on the market.

–  i.e. an undertaking dominant in an upstream market and also present in a downstream market refuses to supply the resource over which it is dominant to a competitor on that downstream market.

–  The duty to supply is contrary to the freedom of contract. It comes from the ‘special responsibility’ of the dominant undertaking.

Article 102 TFEU •  Abuses concerning refusals to supply: cases

•  Commercial solvens (1974): Commercial Solvens was using its dominant position on the raw material market to affect competition on the derivatives market, that it refused to supply to a customer because it wanted to compete with it downstream.

•  Napier Brown/British Sugar (1990): the Commercial Solvens principle is applied to a deliberate move to remove a competitor from a downstream market: the dominant supplier of industrial sugar, which itself produced the derivative retail sugar, refused to supply industrial sugar to a competitor on the downstream market.

Article 102 TFEU •  Abuses concerning refusals to supply: the ‘essential facility’

concept

•  Essential facility: is domething owned or controlled by a vertically integrated dominant undertaking to which other undertakings need acces in order to provide products or services to customers. This is a ‘bottleneck monopoly’. A refusal to grant access to an essential facility is a breach of the special responsibility that the holder of the facility has as a dominant undertaking.

•  But: when does access have to be given? To whom does it have to be given? On what terms?

Article 102 TFEU •  Abuses concerning refusals to supply: the ‘essential facility’

concept

•  Oscar Bronner (1998): 4 factors should be present for a refusal to be an abuse:

•  1. the refusal would have to be likely to eliminate all competition in the downstream market from the person requesting access;

•  2. the refusal must be incapable of objective justification; •  3. the access must be indispensable to carrying on the other

person’s business; •  4. There must be no actual or potential substitute for it.

Article 102 TFEU •  Abuses concerning refusals to supply and intellectual property

rights –  Magill (1995): it concerned copyright in ‘television listings’ (tv

programme schedules). Listings of programs to be broadcast were protected by UK intellectual property law (not also in other EU state members, where IP rights cover only the fruits of creative or intellectual effort.

–  An Irish publisher, Magill, started to publish a comprehensive weekly tv guide giving details of all programmes available. It was challenged by TV operators.

–  The EU Commission and ECJ held that tv companies have infringed article 102: the companies were each dominant in the market for their weekly listings their policies were driven by the desire to protect their own weekly guides in the downstream markets.

Article 102 TFEU •  Collective dominance •  ‘any abuse by one or more [economically independent]

undertakings of a dominant position’

–  Flat glass (1992): abuse of joint dominance. Three companies were united by such economic links that, by virtue of that fact, together they hold a dominant position. i.e.: through agreements or licences they had a technological lead affording them the power to behave to an appreciable extent independently of their competitors, their customers, their consumers. In other words, it is not only for the structure of the market. There must be some ties between operators.

Article 102 TFEU •  Collective dominance

–  The Commissione applied the conscept to undertakings bound by contractual links.

–  The economic links may be contractual, structural (such as cross shareholdings or common directorship) or provided by the structure of the market which ensures parallelism of behaviour between firms on an oligopolistic market.

Documents

European Competition Law - Area Sistemi Informativi - …host.uniroma3.it/facolta/economia/db/materiali/...whole or as a number of separate products is illustrated by Hugin (1979)