Dominance Abuse of dominance Manas Kumar Chaudhuri Advocate

Dominance & Abuse of dominance Manas Kumar Chaudhuri, Advocate, Head Competition Law Practice J Sagar Associates New Delhi India 29 th – 31 st August, 2007, Lilongwe, Malawi

Dominant position • Dominant position means a position of strength, enjoyed by an undertaking, in the relevant market which enables it to – 1. operate independently of competitive forces prevailing in the relevant market or 2. affect its competitors or consumers or the relevant market in its favour

Dominant position (contd. ) • Has the ability to behave independently of its competitors, customers, suppliers and ultimately the final consumers • Holding such market power would have the ability to set prices above the competitive level • Can sell products or provide services at inferior quality • Can also reduce rate of innovation that would otherwise exist in a competitive market

Dominant position (contd. ) • Accounts for a significant share of a given market • Has significantly large market share than its next largest rival • Many legislations do not provide for any arithmetical figure to identify market shares but some consider a market share of 40% or more is dominance • Raises competition concerns when they have the power to set prices of their own

Factors to determine ‘dominance’ • • Market share of the enterprise Size and resource of the enterprise Size and importance of competitors Economic power of the enterprise Commercial advantages over competitors Vertical integration of the enterprises Sale or service network of vertically integrated enterprises • Dependence on consumers on the enterprise

Factors (contd. ) • Monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise • Entry barriers including regulatory barriers • Financial risk • High capital cost of entry • Marketing entry barriers • Technical entry barriers

Factors (contd. ) • High cost of substitutable goods or service for consumers • Market structure and size of market • Social obligation and social cost • Countervailing buying power

Predatory Pricing • Means the sale of goods or provision of services, at a price which is below the cost of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors • A deliberate strategy usually by a dominant firm • Once the competitors have been driven out the predator can raise prices and earn higher profits • Generally continues till the competitors are eliminated • If it continues for a long period of time, it would benefit consumers and may not be noticed by a Competition Authority or even if noticed may not be a competition issue

Predatory Pricing (contd. ) • Some authorities frown upon predatory pricing whether or not it helps predator to recoup losses later • Reduction of competition or elimination of competitors – sufficient • Some other authorities initiate action only when the predator starts recouping past losses

Dominance is not bad • Dominance per se is not bad in most Competition and Anti-trust laws • Its abuse is prohibited • The abuse of dominance must be felt in a relevant market

Filters before adjudication • Determination of dominance • Determination of relevant market • Determination of relevant product and geographic market • Prima facie: abuse of dominance is seen in a relevant market

Abuse of dominance • When a dominant undertaking directly or indirectly imposes unfair or discriminatory a) condition in purchase or sale of goods or service; b) price in purchase or sale (including predatory price) of goods or service • Limits or restricts a) production of goods or provision of services or market therefor; b) technical or scientific development relating to goods or services to the prejudice of consumers

Factors of abuse (contd. ) • The dominant undertaking indulges in practice or practices resulting in denial of market access • It makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage have no connection with the subject of such contracts • It uses its dominant position in one relevant market to enter into, or protect, other relevant market

Relevant Market • Means the market which may be determined by the Competition Authorities with reference to the relevant product market or the relevant geographic market or both • Therefore product and geographic area are the two main ingredients for determining ‘relevant market’ in a competition analysis

Relevant Product Market • Means a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use • Coca Cola may be a substitute of Pepsi Cola but a Fruit Pulp Juice may not be, though quenches thrust

Relevant Geographic Market • Means a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas

European Court of Justice Judgment explained the meaning of dominance under the Treaty of Rome as under: “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, its customers and ultimately of the consumers” [Hoffman-La. Roche (1979) and United Brands (1978)] Source: Competition Law & Policy in the EU 2005 page 26

Remedies • The new enforcement regulation of EC has authorized the EC to order structural relief, which could include divestiture • The EC may only use structural measures to correct abuse of dominance where there is no equally effective behavioural remedy • The EC can order interim relief, which is particularly significant in cases about access

Remedies (contd. ) • Behavioural orders and financial sanctions remain the principal tools • Substantial recent fines include: - EUR 13 million for exclusionary pricing in telecoms - EUR 24 million for loyalty rebates - EUR 497 million against Microsoft

Remedies (contd. ) • Indian Competition Law provides the following remedies: - cease and desist order - 10% of the average turnover for the last three preceding financial years - award compensation - division of enterprise enjoying dominant position

Some cases Glaxo. Smith. Kline – Predatory Pricing France’s competition agency, Conseil de la Concurrence, has fined Glaxo. Smith. Kline PLC € 10 million in the country’s first ever prosecution for predatory pricing. Europe’s largest drug maker was found to have sold its injectable antibiotic Zinnat at prices below cost in a scheme designed to force a competing generic drug producer, Flavelab, to exit the market. Succeeding in eliminating Flavelab from the market, Glaxo. Smith. Kline then raised the price for Zinnat to levels that allowed it recoup its losses and reap anticompetitive profits. According to the agency, Glaxo. Smith. Kline’s aggressive pricing also succeeded in deterring two potential competitors, Panpharma and Ggam, whose generics would have directly competed with Zinnat [Source : Squire Sanders Anti-trust & Trade Regulation Update April 2007]

Some cases (contd. ) British Airways case On March 15, 2007, the European Court of Justice ruled to uphold the EC’s 1999 finding against British Airways that BA had abused its dominant position in the market for travel agency services. Following a complaint by rival Virgin Atlantic Airways, the Commission determined that BA’s performance reward scheme had the effect of inducing travel agents in the UK to maintain or increase their sales in BA tickets over that of competing airlines. The ECJ found that this amounted to an abuse of dominance. The Commission had initially fined BA € 6. 8 million. In December 2003, the Court of First Instance dismissed BA’s action against that decision, and BA had appealed to the ECJ. [Source : Ibid]

Case Mittal Steel South Africa Competition Tribunal of South Africa recently found that Mittal Steel South Africa had contravened the Competition Act (89/1998) by charging excessive prices under Section 8(a) of the Act for its flat steel products to the detriment of consumers. The Tribunal found that Mittal had set its base prices for flat steel products in the domestic market with reference to the demand supply conditions prevailing in arbitrarily selected foreign markets, and had added to that price the notional cost of importing the product to South Africa from these arbitrarily selected foreign markets. In addition, the Tribunal found that, in order to maintain its target price in the domestic market (import parity price), Mittal had: i) withheld supply to the local market by disposing of its surplus output in the international market and also in some domestic niche markets where competitive conditions obliged Mittal to accept prices below its target price; and ii) segmented the market by contractually preventing customers who receive lower prices from redirecting this discounted product into the higher-priced domestic market Tribunal concluded: “Mittal employs its super-dominance to achieve its target price by ensuring that the excess supply that exists at that price is removed from the domestic market and that it does not re-enter the domestic market again” [Source: International Law Office Newsletter – 28 June 2007]

Challenges before developing countries • Competition Law is a mix of complex economic principles implemented initially in accordance with quasi-judicial principles and ends in appeal by pure judicial methods • Competition assessment is a specialized branch of economics – more precisely econometrics, industrial organization and game theory

Challenges (contd. ) • Very few developing countries teach these complex principles of economics in their universities – crunch of resource personnel • In pure judicial structure, unless admissible evidences are adduced – the law courts tend to disregard economic principles as evidences • Lack of irrebuttable industrial data to substantiate economic evidences • Non-availability of domestic past precedence • Competition Laws are national laws of sovereign countries – hence application of overseas laws and jurisprudence, except for persuasive values, has no binding force

Challenges (contd. ) • Competition authorities have been established across the globe at an alarming speed – but the basic capacity to implement this law is developed later • Many international agencies are trying to bridge this gap but limitations exist • Economies of countries vary so do political systems • Competition Authorities remain sub-ordinate to political system in most developing countries thereby not able to address issues of anti-competitive behaviour of government owned enterprises or state-aid given to such enterprises • Social welfare versus economic welfare – whom to give priority • Life-saving patented drugs versus affordability of an ailing buyer - [Registered IPRs mostly exempted]

Way ahead • International co-operation for capacity building • Development of national competition policy in developing countries – commensurate with their national needs • Introduction of appropriate academic course curricula at school, college and university levels • Specialized course curricula for business schools, law schools, economic institutes, accountants’ institutes • Customized capacity building for stakeholders • Dominant knowledge-holder of this subject should not abuse its position – transparency in co-operation

Thank you manas@jsalaw. com