The Commission is inviting comments on its discussion paper setting out possible principles for applying Article 82 to exclusionary abuses such as predatory pricing, rebates, tying and bundling and refusal to supply. The consultation period ends on 31 March 2006. The Commission is continuing to work on an approach to other exploitative and discriminatory practices this year although there is likely to be a degree of overlap between the two. The Commission’s aim is to ensure that Article 82 is applied clearly and consistently by the Commission, national competition authorities and national courts on the basis of an economics-based assessment and current market realities. This consultation is the first step in the process and it is not yet clear what form any final guidance might take.
The discussion paper provides a summary of previous Commission, ECJ and CFI decisions within a suggested framework with which to analyse abuse of a dominant position. Specifically it provides guidance on market definition, dominance, specific exclusionary conduct and possible efficiencies and objective justifications which can be raised as well as considering aftermarkets. The paper also clearly states that the overall aim is to protect competition (with the resulting benefits for consumers) rather than competitors.Market Definition
The paper focuses on the specific market definition issue which arises in the context of Article 82 cases where the prevailing price charged by a dominant undertaking is unlikely to be competitive and hence is not a suitable benchmark. Where this is the case the standard market definition test as to whether products are substitutable following a small but significant increase in price is unlikely to work and markets could be defined too widely. The Commission has suggested additional methods for testing market definition such as reconstructing the competitive price, examining the characteristics and use of the products concerned and comparing prices across regions.Dominance
The paper does not depart from the definition of dominance well-established by case law but adds that an undertaking must have substantial market power for it to be dominant. However, it is not necessary to have eliminated all competition to prove dominance. The paper sets out the various factors which whilst not individually determinative can indicate dominance such as the market position of the undertaking, barriers to entry, and the market position of buyers. High market shares of 50% and over indicate likely dominance although it is noted that even companies with shares below 40% can be considered dominant. When identifying barriers to entry the paper focuses on rivals’ ability to replicate the circumstances that give advantages to the dominant undertaking. Equally the ability of strong buyers to constrain a dominant undertaking must be viewed in light of their ability not only to protect themselves but also the market as a whole by for example, sponsoring entry. Collective dominance is discussed in similar terms as for merger control.Framework for Analysis
The central concern of Article 82 with regard to exclusionary abuses is expressed as foreclosure that has effect as well as the capability of hindering competitors. However, there may be a presumption of abuse where conduct clearly creates no efficiencies and only raises obstacles to the remaining competition. The dominant company must rebut this presumption with evidence that there is no adverse effect. The paper also sets out the principles to be applied to price-based exclusionary conduct including the hypothetical “as efficient” competitor test. Foreclosure of an as efficient competitor can usually only result if the dominant company prices below its costs.
The discussion paper also raises the defences available to a dominant undertaking to prove that:
- any negative effects of its conduct are outweighed by the efficiencies created;
- the conduct is objectively justifiable on the basis that it is either an objective necessity or the dominant undertaking is meeting competition.
The latter in particular appears to be a very difficult test to satisfy. The conditions for a successful efficiency defence are similar to those of Article 81(3) and the paper states that these are unlikely to be fulfilled by a dominant company with a market position approaching that of a monopoly i.e. with a market share over 75%.
Specific Exclusionary Conduct
- Predatory pricing
The paper makes the point that predatory pricing is a risky strategy but that predation of actual competitors can work not only by eliminating competitors but also by disciplining competitors. Predation is presumed where dominant companies price below cost. The Commission has chosen to use an average avoidable cost benchmark rather than average variable cost when assessing whether a company is covering its costs. This is an alternative to having to define fixed and variable costs. The paper also sets out the circumstances where it is necessary to prove incentives to predate and the ability to recoup losses. Defences of meeting competition or efficiency are likely to be difficult to apply to predatory pricing.
- Single branding and rebates
Single branding obligations are defined as those which require the buyer to concentrate its purchases on one supplier. For both single branding obligations and rebates the negative effects will depend on the size of market share tied by these arrangements. The paper makes the distinction between conditional rebates and unconditional rebates for the purposes of the assessment. It provides a detailed economic-based analysis for measuring the loyalty enhancing effects of conditional rebates and the ability of as efficient competitor to compete. The Commission notes that single branding obligations and rebates can have both efficiency enhancing as well as anti-competitive effects.
- Tying and bundling
Whilst tying and bundling can lead to price discrimination and higher prices, the discussion paper only deals with the foreclosure effects. The paper identifies the factors which indicate that a tie is an abuse including that the tying and tied goods must be distinct products and that a sufficient part of the market is tied by the dominant undertaking.
- Refusal to supply
The paper focuses on vertical foreclosure caused where a dominant supplier denies access to an input in order to exclude that buyer. The assessment covers situations where an existing supply relationship is terminated (including constructive refusals to supply), refusal to start supplying an essential input and refusal to supply information needed for interoperability. The Commission will consider whether the input is indispensable to carry on activity in the market when analysing refusal to supply an input.
Refusal to licence intellectual property rights will only in exceptional circumstances constitute abuse, as per the current case law. The Commission appears to propose extending this by suggesting that refusals to license indispensable intellectual property could also be abusive where the refusal prevents new innovation.
These secondary markets comprise complementary products purchased after the purchase of another product to which they relate. The paper considers the approaches to defining the relevant product market and the dominance assessment which will include an analysis of competition on both primary and secondary markets. There is a presumption that it is abusive for a dominant company to reserve the aftermarket for itself (usually through tying or refusal to deal).
Source: European Commission press release of 19th December 2005 and staff discussion paper found at: http://europa.eu.int/comm/competition/antitrust/others/article_82_review.html