The Director General of Competition of the European Commission, PhilipLowe, has announced that the Commission has commenced an internal review of the operation and application of Article 82 of the EC Treaty, on abuse of dominant position. The Commission intends to ensure that its application of Article 82 is consistent with its policy of economic realism in relation to Article 81 and its Modernisation programme under Article 81 (see the March 2003 issue of this Bulletin). The review is intended to ensure clarification and transparency of the Commission’s policy on abuse of dominant position and will thus introduce a more systematic approach in the context of the EC Modernisation Regulation 1/2003, contributing to the cohesion and effectiveness of EC competition policy enforcement.

The Commission’s review will take, as a starting point, the caselaw of the European Court of Justice (“ECJ”) and the Commission’s previous decisions in the area. It will then be guided by the two main principles of ensuring that the correct economic principles are applied and the policy can be effectively enforced by means of clear and simple rules. This will, inter alia, involve identifying particular sectors on which the Commission should concentrate its enforcement efforts, and utilising existing sector knowledge in that enforcement.

All cases under Article 82 EC involve: first, definition of the relevant product and geographic markets; second, identification of dominance; and third, establishing whether there has been an abuse of that dominant position. With regard to market definition, the Commission will review its existing notice on market definition, which involves the concept of cross-price elasticity of demand or the use of the SSNIP test (a question of whether a small but significant non-transitory increase in price would result in a shift in demand between products or sources of supplies) to determine market definition. In particular the Commission will take into account the so-called “cellophane fallacy” which states that where there is already a dominant position, prices are already maximised, thus distorting the application of the SSNIP test because the existence of market power results in price-maximisation, thereby destroying the underlying assumption of the SSNIP test, that prices are set at competitive levels.

With regard to the concept of dominance, the Commission will review the extent to which large market shares (over 50%) should properly create a presumption of dominance, and the extent to which other matters such as barriers to entry should be given greater emphasis in defining market power. With regard to the concept of abuse, the Commission has hitherto focussed mainly on exclusionary abuses rather than exploitative abuses. The Commission will address the level of proof required for finding of exclusionary abuses and whether potential as opposed to actual competition-restricting effects are sufficient. The Commission will further examine the extent to which objective justifications are a satisfactory defence to allegations of abuse of dominant position, including claims of legitimate objectives such as health, consumer protection or efficiency gains that outweigh any alleged anti-competitive effects. The Commission will assess the elements that need to be taken into account in the context of each type of abuse and will in particular address the “meeting the competition” defence. For example, this could involve assessing the extent to which apparently discriminatory pricing might be allowable by a dominant company to enable it to respond to targeted promotional marketing by a smaller competitor to its particular customers.

It is expected that the review, which will be completed during the course of 2004, will address a number of current issues relating to specific abuses, such as the extent to which the long run incremental cost approach should be applied to predatory pricing, (as used by the Commission in relation to network industries, in particular telecommunications) in contrast to the AKZO test of the ECJ (involving assessment of whether a price falls below average total costs, with intent to injure a particular competitor, or below average variable costs). In addition, the question of the ability of a dominant undertaking to recoup the losses incurred in preparatory pricing will be assessed. This is an important aspect of the economic principles of preparatory pricing, but has not, so far, featured in the EC caselaw. The Commission will consider the policy lines and general approaches to be taken on these and other pricing abuses, including excessive pricing, discriminatory pricing and loyalty rebates.

Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.