GREETINGS TO DELEGATES AND PARTICIPANTS AT THE SEMINAR

GREETINGS TO DELEGATES AND PARTICIPANTS AT THE SEMINAR ON ENHANCING DEVELOPMENT THROUGH A COMPETITION CULTURE NEW DELHI 14 AUGUST 2008 Copyright - Dr. S. Chakravarthy 1 1

DOMINANCE AND ITS ABUSE Dr. S. CHAKRAVARTHY (Profession : Civil Servant) Formerly, Member, Monopolies and Restrictive Trade Practices Commission, Member, High Level Committee on Competition Policy and Law And Member of Committee for Drafting the Law. Presently, Adviser/Consultant Competition Policy and Law HYDERABAD, INDIA Copyright - Dr. S. Chakravarthy 2

DOMINANCE IN COMPETITION LAW MANY COMPETITION LAWS ADDRESS DOMINANCE AND ITS ABUSE SO DOES THE INDIAN COMPETITION LAW, NAMELY, COMPETITION ACT, 2002 (AMENDED IN SEPT 2007). EU HAS A PROVISION ON DOMINANCE SIMILAR TO INDIA Copyright - Dr. S. Chakravarthy 3

DOMINANCE n n n “DOMINANT POSITION” CAN BE AND HAS BEEN DEFINED IN SOME COMPETITION LAWS IN THE WORLD IN TERMS OF THE “POSITION OF STRENGTH, ENJOYED BY AN ENTERPRISE, IN THE RELEVANT MARKET” WHICH ENABLES IT TO (I) OPERATE INDEPENDENTLY OF COMPETITIVE FORCES PREVAILING IN THE RELEVANT MARKET; OR (II) AFFECT ITS COMPETITORS OR CONSUMERS OR THE RELEVANT MARKET, IN ITS FAVOUR THE INDIAN NEW LAW, COMPETITION ACT, 2002 (AMENDED IN SEPT 2007) FOLLOWS THIS DEFINITION. Copyright - Dr. S. Chakravarthy 4

DOMINANCE – MARKET n DETERMINATION WHETHER AN ENTERPRISE HAS A DOMINANT POSITION HAS TO BE WITH REFERENCE TO A DEFINED MARKET n AN ENTERPRISE’S DOMINANT POSITION HAS TO BE IN RELATION TO ITS POWER WITH RESPECT TO THAT DEFINED MARKET MEANS RELEVANT MARKET Copyright - Dr. S. Chakravarthy 5

RM = RPM + RGM RELEVANT MARKET (RM) HAS TWO DIMENSIONS, NAMELY, * RELEVANT PRODUCT MARKET(RPM) * RELEVANT GEOGRAPHIC MARKET(RGM) Copyright - Dr. S. Chakravarthy 6

PRODUCT MARKET INTERCHANGEABILITY OR SUBSTITUTABILITY OF GOODS/SERVICES BY CONSUMERS/PURCHASERS 1. DEMAND SUBSTITUTABILITY – SUBSTITUTES CONSUMER WOULD SWITCH TO IF PRICE OF PRODUCT INCREASES 2. SUPPLY SUBSTITUTABILITY – SUBSTITUTES PRODUCERS WOULD SWITCH TO PRODUCE WITH EXISTING FACILITIES IF CONSUMERS WANT Copyright - Dr. S. Chakravarthy 7

RELEVANT PRODUCT MARKET - FACTORS n n n PHYSICAL CHARACTERISTICS OR ENDUSE OF GOODS; PRICE OF GOODS OR SERVICE; CONSUMER PREFERENCES; EXCLUSION OF IN-HOUSE PRODUCTION; EXISTENCE OF SPECIALISED PRODUCERS; CLASSIFICATION OF INDUSTRIAL PRODUCTS. Copyright - Dr. S. Chakravarthy 8

RELEVANT GEOGRAPHIC MARKET - FACTORS n n n n REGULATORY TRADE BARRIERS; LOCAL SPECIFICATION REQUIREMENTS; NATIONAL PROCUREMENT POLICIES; ADEQUATE DISTRIBUTION FACILITIES; TRANSPORT COSTS; LANGUAGE; CONSUMER PREFERENCES; NEED FOR SECURE OR REGULAR SUPPLIES OR RAPID AFTER-SALES SERVICES Copyright - Dr. S. Chakravarthy 9

DOMINANCE- IMPORTANT FACTORS n n n MARKET SHARE OF THE ENTERPRISE SIZE AND RESOURCES OF THE ENTERPRISE SIZE AND IMPORTANCE OF THE COMPETITORS ECONOMIC POWER OF THE ENTERPRISE INCLUDING COMMERCIAL ADVANTAGES OVER COMPETITORS DEPENDENCE OF CONSUMERS ON THE ENTERPRISE ENTRY BARRIERS Copyright - Dr. S. Chakravarthy 10

DOES DOMINANCE REQUIRE AN ARITHMETIC FIGURE? n SOME SUGGEST AN ARITHMETIC FIGURE OF MARKET SHARE TO ASCERTAIN DOMINANCE n LOGIC IS AGAINST A THRESHOLD AS IT MAY HARASS A GOOD COMPETING ENTITY AND ALLOW AN OFFENDING ENTITY TO ESCAPE n AS LONG AS DOMINANCE IS NOT TO BE FROWNED UPON, A GENERIC DEFINITION IS BETTER THAN MARKET SHARE THRESHOLD DEFINITION Copyright - Dr. S. Chakravarthy 11

ABUSE OF DOMINANCE ARISES IF AN ENTERPRISE • IMPOSES UNFAIR /DISCRIMINATORY PURCHASE OR SALE PRICES (INCLUDING PREDATORY PRICES) • LIMITS PRODUCTION, MARKETS OR TECHNICAL DEVELOPMENT • DENIES MARKET ACCESS • CONCLUDES CONTRACTS SUBJECT TO OBLIGATIONS HAVING NO CONNECTION WITH THE SUBJECT OF THE CONTRACTS. • USES DOMINANCE TO MOVE INTO OR PROTECT OTHER MARKETS RELEVANT MARKET = RELEVANT PRODUCT MARKET + RELEVANT GEOGRAPHIC MARKET Copyright - Dr. S. Chakravarthy 12

THREE STEPS n FOR ESTABLISHING ABUSE OF MARKET DOMINANCE, THE THREE CRITICAL STEPS ARE 1. MARKET DEFINITION 2. MARKET DOMINANCE 3. ABUSE OF DOMINANT MARKET POWER Copyright - Dr. S. Chakravarthy 13

UNFAIR PRICING IS ABUSE OF DOMINANCE n n TELECENTRI IS A WHOLLY OWNED COMPANY OF THE MINISTRY OF TELECOMMUNICATION AND POST IN GEORGIA WITH EXCLUSIVE RIGHTS TO OPERATE THE COUNTRY’S TELECOMMUNICATION SYSTEM. CAUCASIA IS A TV COMPANY IN THAT COUNTRY USING TELECENTRI’S NETWORK UNDER AN AGREEMENT TO TRANSMIT TV PROGRAMMES IN THE CAPITAL CITY OF TBILISI. ALL OF A SUDDEN, TELECENTRI QUOTED A VERY HIGH PRICE OF US$ 100 FOR THE BROADCAST OF SERVICES ALL OVER THE COUNTRY. CAUCASIA WAS INTERESTED ONLY IN THE TRANSMISSION OF ITS PROGRAMMES INSIDE TBILISI (US$ 10). THE STATE ANTI-MONOPOLY SERVICE OF GEORGIA (SASG), AFTER AN ENQUIRY FOUND THAT TELECENTRI WAS VIOLATING THE COUNTRY’S COMPETITION LAW AND WAS ABUSING ITS DOMINANT POSITION AND DIRECTED THE COMPANY TO CEASE AND DESIST FROM THE PRACTICE. UNFAIR PRICING IS ABUSE OF DOMINANCE. Copyright - Dr. S. Chakravarthy 14

LIMITING TECHNICAL DEVELOPMENT IMPEDES FAIR COMPETITION n n n JAPANESE MANUFACTURERS OF PERSONAL COMPUTERS DECIDED TO INSTAL MICROSOFT’S WINDOWS OS, WHICH CARRIED SOME AUDIO-VIDEO (AV) FUNCTION IN THEIR COMPUTERS. A LICENSING AGREEMENT WAS DRAFTED BY MICROSOFT, ENJOYING DOMINANCE IN THE MARKET, INCORPORATED WHAT WAS KNOWN AS ‘IMMUNITY PROVISION’ IN THE AGREEMENT. THE SAID PROVISION PROVIDED THAT THE LICENSEES WERE PRECLUDED FROM SUING, PROSECUTING OR ASSISTING IN ANY JUDICIAL, OR ADMINISTRATIVE PROCEEDINGS AGAINST MICROSOFT FOR INFRINGEMENT OF THE JAPANESE MANUFACTURERS’ PATENTS. SOME OF THE JAPANESE MANUFACTURERS OF PERSONAL COMPUTERS OWNED PATENTS IN AV TECHNOLOGIES. BECAUSE OF THE ‘IMMUNITY PROVISION’, THE JAPANESE MANUFACTURERS WERE BARRED FROM ENFORCING THEIR PATENT RIGHTS AGAINST MICROSOFT, EVEN WHEN MICROSOFT WAS FOUND TO BE EXPLOITING OR INFRINGING THEM (PATENTS). THE JAPANESE FAIR TRADE COMMISSION RULED THAT THE LICENSING AGREEMENT WAS HAVING THE POTENTIAL OF CAUSING THE JAPANESE MANUFACTURERS TO LOSE THEIR COMPETITIVE EDGE IN DEVELOPING THE TECHNOLOGY RELATING TO THE AV FUNCTION AND THAT IT WAS IMPEDING FAIR COMPETITION IN THIS AREA OF TECHNOLOGY. THE PROVISION WAS DIRECTED TO BE DELETED FROM THE AGREEMENT. Copyright - Dr. S. Chakravarthy 15

DISCRIMINATORY REBATES AND ABUSE OF DOMINANCE n PRODUCTION AND DISTRIBUTION OF OXYGEN GAS AND RELATED PRODUCTS WERE IN THE HANDS OF CEYLON OXYGEN LIMITED (COL) TO THE EXTENT OF 80% OF THE MARKET. n IN 1993, INDUSTRIAL GASES (PVT) LIMITED (IGL) ENTERED THE MARKET AS COL’S COMPETITOR. SOON IGL NOTED THAT COL HAD STARTED INDULGING IN PRACTICES CONSTITUTING ABUSE OF ITS DOMINANT POSITION. n IGL COMPLAINED TO THE FAIR TRADE COMMISSION (FTC) OF SRI LANKA THAT COL WAS RESORTING TO PREDATORY PRICING, EVIDENCED BY A REDUCTION IN THE DEPOSIT FEE ON OXYGEN CYLINDERS FROM LKR 8500 TO LKR 3000 AND BY A DECREASE IN THE MAINTENANCE CHARGES FROM LKR 75 TO LKR 55 AFTER IGL’S ENTRY. IGL POINTED OUT THAT COL HAD ENTERED INTO AGREEMENTS WITH BULK PURCHASERS MAKING IT COMPULSORY ON THEM TO PURCHASE THEIR ENTIRE REQUIREMENTS ONLY FROM COL FOR AN AGREED TIME PERIOD. IGL FURTHER ALLEGED THAT COL WAS OFFERING SUBSTANTIAL DISCOUNTS ON DIFFERENT TYPES OF GASES AND CYLINDER CHARGES ON A DISCRIMINATORY BASIS. n FTC IDENTIFIED AND HELD THREE COURSES OF CONDUCT AS ANTICOMPETITIVE, NAMELY, PREDATORY PRICING, DISCRIMINATORY REBATES AND EXCLUSIVE DEALING. DISCRIMINATORY REBATES (OR DISCRIMINATORY BEHAVIOUR) ARE AN EXERCISE IN ABUSE OF DOMINANCE. Copyright - Dr. S. Chakravarthy 16

TIE-IN REBATE IS AN ABUSE n VALIO OY IS A FINNISH DAIRY PRODUCTS COMPANY HAVING A DOMINANT POSITION IN THE LIQUID DAIRY PRODUCT MARKET IN FINLAND. n IT HAD A REBATE ARRANGEMENT, IN TERMS OF WHICH, RETAILERS WERE GRANTED DISCOUNTS/REBATES ON THE PRICES OF LIQUID DAIRY PRODUCTS, ON THE BASIS OF THE AVERAGE VALUE OF ALL THE PRODUCTS (LIQUID PRODUCTS, CHEESE, FATS, ICE-CREAM, SNACKS AND JUICE) OBTAINED FROM VALIO. n UNDER THIS SCHEME, RETAILERS WERE FORCED TO MAKE ALL THEIR PURCHASES OF LIQUID DAIRY PRODUCTS FROM VALIO, WHICH HAD THE EFFECT OF TYING CUSTOMERS AND EXCLUDING COMPETITORS FROM THE MARKET. n THE MATTER WAS CARRIED TO THE COMPETITION COUNCIL WHICH CONCLUDED THAT VALIO WAS SEEKING TO CAPTURE THE MARKET AND TO STRENGTHEN ITS MARKET DOMINANCE AND THAT TIE-IN REBATE CONSTITUTED ABUSE OF DOMINANCE. IT IMPOSED A FINE OF FIM 5 MILLION FOR HAVING COMMITTED THE OFFENCE OF ABUSE OF DOMINANCE. Copyright - Dr. S. Chakravarthy 17

PREDATORY PRICING n n PREDATORY PRICING IS A PERNICIOUS FORM OF ABUSE OF DOMINANCE IT OCCURS WHEN A DOMINANT ENTERPRISE CHARGES A PRICE BELOW THE COST OF PRODUCTION WITH A VIEW TO REDUCING COMPETITION OR ELIMINATING COMPETITORS Copyright - Dr. S. Chakravarthy 18

PREDATORY PRICING – MODERN FOOD INDUSTRIES CASE (INDIA) n n PREDATORY PRICING IS A GENRE OF ANTITRUST VIOLATION IT IS SELLING GOODS AT PRICE BELOW COST WITH INTENT TO ELIMINATE COMPETITION/COMPETITORS ACTION BEFORE MRTP COMMISSION AGAINST MODERN FOOD INDUSTRIES PRODUCING BREAD AND BAKERY ITEMS FOR THE OFFENCE OF PREDATORY PRICING COMMISSION RULED MERE CHARGING PRICE BELOW COST CANNOT LEAD TO INDICTMENT MALAFIDE INTENT TO ELIMINATE COMPETITION/COMPETITORS SHOULD BE PROVED Copyright - Dr. S. Chakravarthy 19

AOD MILITATES AGAINST ECONOMIC DEVELOPMENT n n n STUDIES CONFIRM POSITIVE RELATIONSHIP BETWEEN COMPETITION AND DEVELOPMENT(INDECOPI, DUTZ) AOD LESSENS OR STIFLES COMPETITION AOD MAY RESULT IN MONOPOLY/OLIGOPOLY AND CHILL INNOVATION AOD MAY IMPLICITLY DISCOURAGE ENTRY FOR NEW ENTRANTS AOD DRIVES OUT WEAK AND SMALL COMPETITORS (PREDATION) AOD MAY THUS RETARD DEVELOPMENT Copyright - Dr. S. Chakravarthy 20

AOD MILITATES AGAINST CONSUMER INTEREST n n AOD PREJUDICES COMPETITION POSSIBLE MONOPOLY/OLIGOPOLY RESULTS IN LESS CHOICE AND HIGHER PRICES FOR CONSUMERS, PARTICULARLY POOR ONES AOD CREATES BARRIERS TO ENTRY, FORECLOSURE - AGAINST CONSUMER INTEREST AOD PREJUDICES CONSUMER WELFARE Copyright - Dr. S. Chakravarthy 21

GUNNING DOWN AOD DOMINANCE MAY NOT BE GUNNED DOWN ABUSE OF DOMINANCE SHOULD BE PREVENTING OR ELIMINATING AOD HAS DIRECT AND INDIRECT IMPLICATIONS FOR ECONOMIC DEVELOPMENT AND CONSUMER INTEREST Copyright - Dr. S. Chakravarthy 22

DIRECT BENEFITS n LOWER PRICES THRU COMPETITION n MORE CHOICE THRU NEW ENTRANTS n NEW AND BETTER PRODUCTS THRU INNOVATION Copyright - Dr. S. Chakravarthy 23

INDIRECT BENEFITS n OPTIMUM ALLOCATION OF RESOURCES n EFFICIENCY ENHANCEMENT IN ENTERPRISES n TECHNICAL PROGRESS n ECONOMIC DEVELOPMENT Copyright - Dr. S. Chakravarthy 24

FINALE MODERN COMPETITION LAWS DO NOT FROWN UPON DOMINANCE AS SUCH BUT FROWN UPON ABUSE OF DOMINANCE Copyright - Dr. S. Chakravarthy 25

THANK YOU FOR YOUR KIND ATTENTION Copy right Dr. S. Chakravarthy Copyright - Dr. S. Chakravarthy 26