The regulation of abuse of dominance is one of the most important regulations in a market since the integrity of the market can only be guaranteed by strict legislation guaranteeing competition. All enterprises operate in a market ruled by the laws of supply and demand, with different economic actors. It is very important to encourage competition between companies so that the goods they offer to consumers are better adapted to their needs at realistic prices. Abuse is precisely one of the practices that limit competition the most.
Factors to detect a dominant position
We cannot determine dominance by looking at just one factor. Many factors must be assessed. European competition law does not sanction dominant positions but only abuses. Before detecting an abuse, it is certainly necessary to know how to recognize a dominant position. Factors to be analyzed include market share, reference market, barriers to entry and exit from a market, the financial strength of a company, the number of competitors and the market share, among others. The list of factors that generally affect the determination of dominance is very extensive. However, we will not analyse all of them, but focus on the most relevant ones.
The dominant position of an undertaking must necessarily relate to a particular market. Therefore, one of the first steps in establishing dominance, even before determining market share, is to identify the specific market in which a particular undertaking operates. In general terms, in order to be able to analyse the relevant market, the following elements should be taken into account:
§ The product market: the set of goods and services that consumers generally consider to be interchangeable, the characteristics of these, and the prices and benefits that can be obtained from them.
§ The geographical market: the area in which the demand and supply of goods and services are distributed, with homogeneous conditions of competition, so that it can be separated from other areas where conditions are heterogeneous.
It would also be interesting to examine the temporary market, as extracted from the United Brands case (Judgment of the Court of 14 February 1978, United Brands Company), where it was shown that the demand for bananas varied from one season to another, depending on the existence and availability of bananas. In addition, a definition of the relevant market can be found in the Commission’s decision in AKZO (Commission Decision of 14 December 1985 IV/30.698 – ECS/Akzo Chemie).
Market share is defined as the percentage of sales of a product or service that a company makes in a market, taking into account all competing companies. Thus, each competitor offering a substitute or similar good will have a market share, and all together they will reach one hundred percent of the market. Therefore, if this indicator is high, we can conclude that the company is quite widely accepted in the market and consumers tend to prefer the products of this company.
However, the fact that a company has a high market share may lead it to engage in anti-competitive practices by taking advantage of its superiority. For this reason, it is a key criterion. The importance of this term has already been underlined in the European case Hoffmann-La Roche (Judgment of the Court of 13 February 1979, Hoffmann-La Roche), where it was stated that market share is always one of the most important factors in determining the dominant position of a company, but always taking into account the characteristics and context of each individual case.
Under European law, we can identify three possible scenarios:
a) A company with a market share of 25% or less. This does not generally constitute the existence of a dominant position.
b) A business entity with a quota of 40% or less or less than 45%. The analysis of the existence of a dominant position does not normally arise but raises at least some doubts. Reference can be made to the United Brands case, in which it was concluded that an undertaking with a market share of between 40% and 45% had a dominant position if this was justified by a combination of other factors.
c) Companies with a share of more than 50%. Often this indicates dominance, unless there is other evidence to the contrary, as can be inferred from the AKZO case.
Barriers to entry
It is also important to analyse the existence of barriers as an indicator of dominance, as the future competition in a market depends on the existence of barriers. By barriers, we mean the set of difficulties that a firm faces in competing in a new or existing market. Three types of barriers can be distinguished: natural barriers, legal barriers, and barriers to competition.
The first group is barriers created by the existence of competition in a market. These barriers disadvantage potential competitors for reasons such as high investment, access to information, etc.
The second group includes trade barriers created by national or supranational institutions in the exercise of their powers, including property rights, tariffs, non-tariff barriers, etc.
The third group is barriers created by companies. These are artificial barriers whose legality will be subject to a number of factors, the most important is the market position of the company. These are the most problematic barriers from the point of view of abuse of dominance.
Abuse of dominant position
Having analyzed the different types of factors that determine dominance, it is appropriate to consider whether the dominant undertaking’s conduct can be characterized as abusive. Abuse of dominance could be defined as unilateral conduct using dominant market power (or a dominant position) to harm competition in the market.
Article 102 TFUE does not specifically mention what constitutes abuse, but it illustrates some of the behaviors that may be considered to constitute abuse. Specifically, the article states that “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 in so far as it may affect trade between the 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”.
Abuses can be grouped into two main groups according to the economic effects they have. Exploitative agreements, with negative effects on consumers, and exclusionary agreements, with negative effects on competitors in general. Most of the abuses that take place are exclusionary abuses. Exploitative agreements aim to attack the interests of consumers, customers or suppliers. They are carried out by taking advantage of the company’s superiority. Examples of behavior that could be included are excessive pricing, discrimination between customers without objective justification, and paying unreasonably low prices for supplies.
Exclusionary agreements, on the other hand, are agreements whose purpose is to reduce effective competition in a market by seeking to prevent the entry or existence of competitors in that market. This type of behavior includes exclusivity agreements, discrimination, product tying, refusal to supply, predatory pricing, etc. This can be to the detriment of consumers, suppliers, and actual or potential competitors. In order to know whether an action is abusive, companies have at their disposal both the law, case law, Commission notices, and guidelines, as well as “guidance letters” on new issues related to Articles 101 and 102 TJUE.
Competences of the European Commission
In order to carry out the tasks assigned to it by the Regulation, the Commission may carry out the necessary inspections of undertakings and associations of undertakings. Accordingly, officials and other persons authorized by the Commission to carry out an inspection are entitled to:
a) have access to all premises, land, and means of transport of undertakings and associations of undertakings
b) examine books and any other business records, regardless of their physical form
c) make or obtain copies or extracts, in whatever form, of such books or documentation
d) to seal any premises, books, or documents of the undertaking for such time and to such extent as may be necessary for the inspection
e) ask any representative or member of staff of the undertaking or association of undertakings for explanations of facts or documents relating to the subject matter and purpose of the inspection and keep a record of their replies.
Undertakings and associations of undertakings will be required to submit to inspections ordered by the Commission. The decision will indicate the object and purpose of the inspection, the starting date and will refer to the penalties provided for in Article 23 and Article 24 of Council Regulation (EC) N° 1/2003 of 16 December 2002, as well as to the right to appeal against the decision to the European Court of Justice. These decisions will be taken by the Commission after consultation with the competition authority of the Member State on whose territory the inspection will take place.
As regards penalties, the European Commission may, by decision, impose on undertakings and associations of undertakings fines up to 1% of the total revenues of the preceding business year, if intentionally or negligently (Article 23 Regulation 1/2003):
a) provide incorrect or misleading information in response to a request
b) provide incorrect, incomplete, or misleading information in response to a request made by a decision taken or failure to provide such information within the time limit set
c) submit incomplete books or other professional documents as required, or fail to submit to inspections as ordered
d) in response to a question in accordance with Article 20, paragraph 2, e)
– they provide an incorrect or misleading answer, or
– they fail to rectify any incorrect, incomplete, or misleading answer given by a member within a time limit set by the Commission or a misleading answer given by a member of staff, or
– they fail or refuse to provide a full answer on facts relating to the subject matter and purpose of an inspection ordered by a decision taken pursuant to Article 20(4)
e) have broken a seal affixed by officials or their escorts authorized by the Commission
In addition, the Commission may, by decision, impose fines on undertakings and associations of undertakings where, either intentionally or negligently:
a) act abusively by taking advantage of their dominant position on the market
b) contravene a decision ordering interim protective measures
For each undertaking or association of undertakings participating in the infringement, the fine may not exceed 10 % of the total revenue in the preceding business year. When the infringement of an association is related to the activities of its members, the fine may not exceed 10 % of the aggregate revenue of each of the members. To determine the amount of the fine, it is necessary to take into account the seriousness of the infringement and its duration.
On 31 August 2012, the Commission opened its investigation. The Commission found that Gazprom abused its dominant position in the gas supply market in eight Member States (Bulgaria, Czech Republic, Estonia, Hungary, Slovakia, Latvia, Lithuania and Poland) through various commercial practices. In particular, the Commission accuses Gazprom of having infringed EU competition law by implementing a commercial strategy aimed at fragmenting the gas supply market in order to apply an unfair pricing policy. According to the Commission, this strategy would have been accomplished through three behaviors.
First, by imposing territorial restrictions in their supply agreements with wholesalers and industrial customers. These restrictions include export bans and destination clauses, i.e. clauses obliging the use of gas purchased in a given territory. Market fragmentation has a negative effect on the price of the product, as it avoids the natural compensation mechanism that would occur by using the gas surpluses of some Member States.
Secondly, by applying an unfair pricing policy in five Member States (Bulgaria, Estonia, Latvia, Lithuania, and Poland). This pricing policy results from a pricing formula linking the price of gas to the price of certain oil products. This linkage is not in itself illegal, but the Commission suspects that it could have resulted in the imposition of high prices.
Third, the Commission considered that Gazprom was able to use its dominant position in the Bulgarian and Polish markets by making gas supply conditional on different commitments. In Bulgaria, the supply would have been conditional on investment in a pipeline project. In Poland, the condition imposed would have been an agreement to strengthen its control over a gas pipeline. Eventually, the European Commission adopted a decision imposing a series of obligations on Gazprom to allow the free flow of gas at competitive prices on Europe’s gas markets, but the company was not sanctioned.
In 2015, the Commission opened a new investigation into Google’s behavior with regard to the “Android” operating system. In particular, it examined whether the company has committed infringements of competition law through restrictive agreements or abuse of position on the market for operating systems, applications, and services for ‘smartphones’.
The objective of the procedure is to determine whether Google has infringed the competition rules by imposing certain conditions in agreements relating to the use of “Android” or Google-owned applications and services. The investigation focuses initially on three questions: first, whether in the agreements with manufacturers, Google has prevented the development or market access of competing products by requiring or exclusive pre-installation of their applications or services. Second, whether these agreements prevent manufacturers from developing modified or competing versions of Android on other devices. And third, whether Google prevented the development or market access of competing products. Finally, the US technology company was condemned in 2018 by the European Commission because of “illegal practices” in the licensing of Android-powered devices.
The Brussels-based law firm Navas&Cusi is an expert in European Union law, Competition law and experienced in abuse of dominance cases, providing our clients with high quality and specialized legal service.