This article is written by Yamini Jain, a student of III year BA LLB at ILS Law College, Pune, and it provides a detailed analysis of ‘Abuse of Dominance: pricing practices’ along with relevant case laws.

Introduction

‘Dominance’ in Competition Law is the position of strength enjoyed by an undertaking which enables it to operate independently of competitive pressure in the relevant market and also to appreciably affect the relevant market, competitors and consumers by its actions.

Although dominance is a precondition for establishing a violation of Article 102 TFEU; Section 18 of the Competition Act, 1998; or Section 4 of the Competition Act, 2002, it is by no means a sufficient condition. Abuse of dominance is key for Competition Policy. In existing competition laws, there are two kinds of prohibitions of abuse of dominant positions:

• Actions of an incumbent firm to exploit its position of dominance by charging higher prices, etc; and
• Actions of an incumbent in a dominant position to protect its position of dominance by placing barriers for potential entrants in the relevant market.

This article shall illuminate upon the abusive pricing practices prohibited under the aforesaid provisions of the Competition Policy.

Cost concepts

An analysis of the pricing practices indulged into by a dominant undertaking to determine its abusive nature requires consideration of its costs. A price may contravene Article 102 where the prices charged & costs incurred differ excessively; where such discrimination lacks a cost-justification; or it may be unlawful where prices charged are below costs. Hence, it is essential to understand these cost concepts to determine such abusive practices. 

Fixed costs and sunk costs

‘Fixed’ costs are independent of output, ie., they do not vary with the quantity of output produced, whereas a cost is ‘sunk’ (over a given period of time) if it has been irrevocably committed (as of a given time point) and cannot be recovered. It has to be understood that all sunk costs are fixed but not all fixed costs are sunk, and hence they’ve been regarded as distinct concepts by economists[1].

Marginal cost

Marginal cost is the additional cost incurred in the production of one extra unit of a commodity/service, and is derived from the variable cost of production, provided that the fixed costs remain static when output changes. It enables an organization to determine its attainment of the economies of scale so as to optimize the production and overall operations. 

Variable costs

Variable costs are directly associated with the volume of production of goods/services, and can be calculated by multiplying the quantity of output by the variable cost of output per unit.

Avoidable costs

Avoidable costs are those incurred only when a product or activity is continued and its discontinuance will eliminate/reduce these costs, or those that have not been committed & can be recovered. These costs include some fixed and variable costs but omit common costs.

Average variable cost (AVC)

AVC is the variable cost per unit of output, and varies from average total cost in the long-run but not in the short-run. Hence, it assists a firm in deciding whether it should continue its operations in the short-run.

Average avoidable cost (AAC)

AAC is an average of the costs that could’ve been avoided if a company wouldn’t have produced a particular quantity of extra output, and since it includes some fixed costs, it may be higher than a firm’s AVC.

Long-run incremental cost (LRIC)

LRIC models provide for the cost of a whole service/defined increment on the basis of forward-looking costs incurred by an efficient operator, and aid in the decisions of future investments.

Long-run average incremental cost (LRAIC)

LRAIC is the average of all the costs, fixed & variable, that are incurred in the production of a particular good/service. In cases concerning activities protected by a legal monopoly, a presumption of predation prevails whence the prices are below LRAIC.

Average total cost (ATC)

ATC is an average of all fixed & variable costs including common costs, or the total cost per unit of output incurred when a company engages in short-run production.

Stand-alone cost

Stand-alone cost refers to the cost incurred in the production of a single product so that there would be no common costs as a result of other activities.

Exploitative pricing practices

Competition Law critically analyses the exploitative pricing practices indulged into via formation of a cartel to restrict output; excessive (supra-competitive) pricing; or concerted practices of oligopolists, etc. 

Arguments against direct control

The opinion that competition authorities ought to take direct steps under these provisions to control exploitative pricing consists of certain persuasive arguments against direct control of prices that include:

• If normal market forces have their way, in the absence of barriers, large profits gained by the monopolists should act as an incentive to attract entrants, as in the long-run such profits would be self-defeating. Acceptance of such a view ought to be accompanied with equanimity periods, where the market would eventually correct itself, and the intervention of competition authorities would cause undesirable distortion.
• There exist formidable difficulties as regards the determination of exploitative prices and their standards of assessment. Comparison of a monopolist’s price with a hypothetical ‘competitive price’ is as intuitive as a scientific matter, whereas the establishment of ‘reasonable’ price by the addition of a suitable profit margin to the actual cost of producing goods is fraught with various difficulties, such as what constitutes relevant costs, etc.
• A monopolist should be enabled to charge monopolistic prices to earn sufficiently large profits in view of carrying out expensive research work. Alternatively, an opinion of no objections against a monopolist gaining at the consumers’ expense is argued relying on the welfare loss attributable to the restrictions on output imposed by a firm with market power, or a loss to consumer welfare.
• Further, despite the arguments, even if direct control is accepted, a difficulty arises in the casting of a legal rule condemning exploitative pricing to enable a firm to predetermine its position as regards its legality.
• Complexity also arises as regards the crafting of pro-competitive remedies to deal with excessive pricing abuses.
• Finally, while a competition authority is required to possess necessary information for price regulation, which it may lack; it is even more difficult for the Court to determine the accurate level of prices.

Alternative to direct control

In consideration of these problems, the competition authorities resort to deploying their resources against exclusionary practices rather than establishing themselves as price regulators. It is suggested that in cases where a competition authority observes a particular raise in the prices than expected in competitive conditions, it should consider conducting a ‘sectoral review’ via available powers in order to discover the causal features of such a raise in the market. 

Approach in the EU and the UK

In dealing with the matter of high prices, the European Commission has relied upon a legislative mechanism rather than enforcement under Article 102; whereas the UK has established a system of ex-ante regulation of prices via its sectoral regulators. Though it can be seen that neither the EU nor the UK have the appetite of investigating high prices under these statutory provisions, yet in various cases, there have been investigations in both jurisdictions. 

EU Law

What is an excessive price?

Article 102 of TFEU provides that abuse by a dominant undertaking shall include directly/indirectly imposing unfair purchase/selling prices or other unfair trading conditions.  

Determining whether prices are excessive

Cost or price analysis

In the United Brands case, the Court stated that a price is excessive if it has no reasonable relation to its economic value. The issue to be determined is whether the difference between the actual costs incurred and prices charged is excessive and, if affirmative, to consider whether such price is inherently unfair or whence compared to other competing products.

Comparison of a dominant firm’s prices

In the Deutsche Post AG case, the Court determined abuse via an alternative benchmark by comparing the dominant firm’s prices in cross-border mail with its domestic tariff. It has been held in another case that a simple ‘cost-plus’ approach was insufficient to establish the existence of abuse since it is also essential to analyze the economic value of the service provided.

Yardstick competition

In the Bodson case, the Court described the technique of yardstick competition that is comparing the performance of one undertaking with that of the other ones. It stated that such a comparison could provide a basis for assessing the fairness of the prices charged.

Excessive or disproportionate costs should be ignored

In Ministère Public v Jean-Louis Tournier, before the Court of Justice, it was stated that excessive/disproportionate costs shouldn’t be taken into account while determining the reasonableness of prices.

Determining whether excessive prices are abusive 

According to the test laid down in the United Brands case, a price is abusive if the price-cost margin is excessive and is unfairly high compared to other prices.

Further objections to excessive pricing

Excessive pricing that impedes parallel imports and exports

Various applications and interpretations of Article 102 TFEU have been found in certain decisions of the Court (discussed below) as regards the harm that excessive pricing poses to the single market. 

Excessive pricing that is exclusionary

The aim of the Commission’s enforcement activity in relation to exclusionary conduct is to ensure that dominant undertakings do not impair effective competition by foreclosing their competition in an anti-competitive way, thus adversely affecting consumer welfare in the form of excessive pricing or reduction of consumer choice. Factors relevant for such an assessment are:

• Position of the dominant undertaking;
• Conditions of the relevant market;
• Position of the dominant undertaking’s competitors;
• Position of the customers/input suppliers;
• The extent of the allegedly abusive conduct;
• Possible evidence of actual foreclosure; and
• Direct evidence of any exclusionary strategy.

Excessive pricing and aftermarkets

Under economics, it cannot necessarily be assumed that the primary and secondary markets are always discrete. Where a situation of whole-life costing appears in the primary market, excessive prices in the secondary market may act as a competitive constraint to the initial decision of purchasing a primary product, and hence, the existence of a separate aftermarket may be examined while analysing these factors:

• Price & life-time of the primary product;
• Transparency of the prices for the secondary product; and
• The proportion of the price of the secondary product to the value of the primary one.

Buyer power – exclusively low prices

In CICCE v Commission of the European Communities, it was highlighted that similar to excessive pricing, extraction of an unfairly low price demanded by a dominant undertaking on the buying side of the market can also be abusive. 

UK Law

Section 18(2)(a) of the Competition Act, 1998 specifically states that an unfair purchase/selling price may constitute an abuse of dominance. 

Findings of excessive prices

• Napp Pharmaceuticals – Abuse of dominance was held upon the operation of a discriminatory discount policy, predatory price-cutting and excessive pricing based upon the margin between costs and prices;
• Pfizer & Flynn Pharma – The Competition Appellate Tribunal (CAT) set out the framework of the approach to be adopted in cases of this kind;
• A range of possible analyses should be considered to establish a benchmark price/range that’d pertain under conditions of normal competition;
• This price/range should be compared with other competitive prices to determine if they’re excessive;
• If such differential is found to be excessive, consideration should be made as regards its unfairness;
• If unfair, an assessment of the economic value of the product along with the issue of its reasonable relation to other prices should be considered in order to determine whether the dominant undertaking is reaping unusual benefits of such transactions; and
• Objective justification shall be considered[1].

Rejections of complaints about excessive pricing

In Thames Water Utilities Ltd/Bath House and Albion Yard, the OFWAT decided that there was no abuse of dominant position when an excessive amount was charged for the carriage of water to the customers.

Excessively low prices

The Office of Fair Trading (OFT) states that charging of excessively low prices may constitute abuse of dominance only under exceptional circumstances. In a case, the OFT concurred that paying of excessively low prices by offering a commission that failed to cover the costs incurred by another while it was not incumbent upon the company to cover such costs, did not amount to an abuse of dominance. 

Rebates that have Effects similar to exclusive dealing agreements

Overview

Pricing practices are known to have effects similar to that of exclusive purchasing agreements that may horizontally foreclose competitors of the dominant firm. A preliminary introduction to the concept includes:

Rebates, discounts & bonuses take many forms. In Intel v. Commission, a distinction was made between three types of rebates:

• Quantity rebates;
• Exclusivity rebates; and
• Third category rebates.
• The prohibition of both exclusivity & third-category rebates is directly associated with the law prohibiting exclusive dealing agreements by dominant undertakings.
• Rebates may be unlawful but not on the basis of their price-cost analysis, rather on exclusive dealing.
• The law that forbids exclusionary rebates is based on Article 102 wholly.

EU Law

Quantity and other permissible rebates

Quantity rebates are directly linked to the volume of sales to a customer and are presumptively lawful. In the Hoffmann case, the Court accepted that not all discounts should be deemed abusive, whereas in the Intel case it was held that quantity rebates reflect gains in efficiency & economies of scale made by a dominant firm. Rebates are permissible for prompt payments or to customers for rendering services, except when they’re loyalty payments for exclusivity. 

Exclusivity rebates and similar practice

The basic rule

In Hoffmann La Roche, the Court held the entering into exclusive dealing agreements with some customers and offering exclusivity rebates to others to be unlawful & abusive, and hence equated the two concepts.

Recently, in the Intel case, the ECJ has clarified that:

A dominant firm should be able to produce evidence that its usage of exclusivity rebates is not capable of foreclosing competition, upon which the Commission shall analyze the same having regard to:

• the extent of the firm’s dominant position;
• the share of the market covered by the arrangement;
• the conditions of granting rebates along with their duration and amount; and
• the existence of a potential strategy aimed at excluding at least as-efficient competitors.
• Even if found to be foreclosing competition, it is defensible on the ground of objective justification.

Meaning of Exclusivity rebates

Prior to the ECJ’s decision in the Intel case, it was a popular notion that exclusivity rebates are per se abusive and require customers to obtain most of their necessities from the dominant supplier. But the ECJ has swept this aside while stating that “not every exclusionary effect is necessarily detrimental to competition”, thereby shifting this concept from a form-based assessment to economic analysis[2].

Factors that are not relevant to establishing whether exclusivity rebates infringe Article 102 of TFEU

The factors considered irrelevant to establish an infringement of Article 102 via exclusivity rebates were illuminated in the Intel case:

• Evidence of actual foreclosure effects – only necessary to adduce evidence as regards the dominant firm’s incapability of foreclosure.
• Amount of the rebate;
• The short duration of the supply contracts and the right to terminate at short notice;
• The (small) portion of the market concerned in the relevant conduct – there is no ‘appreciable effect’/’de minimis criterion’ in respect of Article 102;
• The rebates granted in response to customer’s requests & buying power;
• The rebates cover only an insignificant proportion of the customer’s total requirement & apply only to a certain segment of the customer’s demand.

The AEC test, which was initially disregarded by the General Court in this case, was later accepted by the ECJ on appeal.

Objective justification

A dominant undertaking is entitled to argue that a loyalty/exclusivity rebate is objectively justified and proportionate, while the onus of proving this lies upon that firm.

Third category rebates

Rebates of this kind are neither quantity nor exclusivity rebates, but have an effect similar to the latter, and maybe unlawful depending upon an appraisal of all the circumstances of the case. It is essential in such cases to determine whether the rebate has a ‘loyalty-inducing/fidelity-building’ effect, and if so, whether that rebate could have an anticompetitive foreclosure effect.

Two steps involved in assessing third category rebates

Relying on its judgment in Michelin I, the ECJ in BA v. Commission, stated that the determination of whether a third category rebate is abusive shall be assessed in two steps:

• Determine whether those rebates can produce an exclusionary effect; and
• Examine whether there exists an objective economic justification for the discounts & bonuses granted.

Relevant factors for the assessment of the effects of third category rebates

Setting individualised targets

A rebate may have an exclusionary effect where a dominant undertaking sets a volume target according to the particular customer that could, practically, be met only if the customer acted as if there was a condition of exclusivity.

Length of the period by reference to which rebates are calculated

The longer the reference period, the more loyalty-inducing the quantity rebate system, since at the end of a longer period, customers are under a greater pressure to reach their target to avail the benefits of such rebates. 

Rebate is calculated by reference to the whole of the turnover

In the BA case, an individualised bonus scheme was discovered similar to that of ‘rollback/retrospective’ rebates, wherein the loyalty-inducing effect is a powerful one. Hence, in a state of uncertainty as to the extent of the rise in the profit margin with the dominant undertaking, the customer would have a strong incentive to remain in a static position and not deflect to other competitors. 

Lack of transparency in a system of rebates

Being an exacerbating factor, it makes the finding of abuse more likely. Contrarily, if a rebate is loyalty-inducing & abusive, it cannot be saved by the fact that it’s transparent. 

Objective justification

Objective justifications have their roots in the two-stage test of its conduct being necessary or that it produces substantial efficiencies. The question of whether such conduct is objectively necessary & proportionate must be determined on the factors external to the dominant undertaking, whereas on for efficiencies, the following conditions must be fulfilled:

• They are likely to be realised as a result of the conduct;
• Conduct is indispensable to the realisation of those efficiencies;
• They outweigh any likely negative effects on competition & consumer welfare in the affected markets; and
• Conduct does not eliminate effective competition.

The Commission’s Guidance on Article 102 Enforcement Priorities

The Commission, in the Guidance Article, discusses the issue of its intervention in relation to conditional rebates, that are granted as a reward for certain purchasing behaviour and can have foreclosure effects on competition. In assessing this, the Commission considers that:

• Price < AAC – rebate is generally capable of foreclosing as-efficient competitors;
•  Price  between AAC & LRAIC – other relevant factors should be taken into account to determine the possibility of anti-competitive foreclosure;
• Price > LRAIC – the rebate is generally not capable of anti-competitive foreclosure.

UK Law

In Napp Pharmaceuticals, the OFT held it to be ‘abuse of dominance’ whence large discounts were being offered to the hospitals while charging excessive prices to the community patients since it considered Napp’s intention to be of eliminating competitors and its reaction to its competitors was held to be unreasonable & disproportionate. Further, on appeal, the CAT found its discounts to be less than the costs, and hence, held such prices to be predatory.

Several cases concerning rebates have been closed since significant consumer detriment was unlikely and they were no longer an administrative priority.

Bundling

EU Law

Rebates having a tying effect

Tying and bundling are closely connected practices and encompass those whereby an undertaking supplies the tying product ensuring that the customer also obtains the tied product along with it. In Michelin II, the Commission found that a bonus scheme enabling the firm to leverage its position in the market to preserve its position in the neighbouring market amounts to an abuse of dominance. 

‘Across-the-board’ rebates

In Hoffmann, the ECJ condemned ‘across-the-board’ rebates since it dissuaded customers from obtaining its requirements from other as-efficient suppliers, and hence deemed such rebates to be in infringement of Article 102(2)(d). An incremental price below LRAIC suggests that an as-efficient competitor may be foreclosed from the market.

Delivered pricing as a tie-in

In the instant case, it was held that by reserving an ancillary market of delivery for itself as part of its activity in a neighbouring but separate market of sale, the firm had abused its dominant position beyond any objective justification. 

Bundling

A firm may sell two/more products together as a bundle and charge more attractive prices for the bundle than for the constituent parts of it. It may have the same effect as a tie-in agreement. 

UK Law

In BSkyB, it was illustrated that the behaviour of a dominant firm should be considered abusive only when it actually has/possibly can have an anti-competitive effect.

Predatory pricing

Introduction

Predatory price-cutting occurs when a dominant firm, in lieu of disciplining existing competitors or foreclosing new entrants, excessively reduces its prices to a loss-making level, and upon achieving this it raises its prices again thereby causing consumer harm, and hence infringes the provisions prohibiting abuse of dominance. The law on predatory pricing has to tread a fine line between not condemning competitive responses and prohibiting unreasonable exclusionary conduct of the dominant firm. 

Areeda and Turner Test

Areeda & Turner test is an economic test for the determination of predatory pricing and suggests that a price below the dominant firm’s AVC should be deemed to be predatory. It relies exclusively on a cost-price analysis and focuses on short-run rather than long-run efficiency.

EU Law

The rule in AKZO v Commission and subsequent cases

Predatory pricing was first considered in the Akzo case, and a rule was laid down by the ECJ to determine predation while rejecting the Areeda-Turner test:

• Price > ATC – not guilty of predation under the rule laid down in Akzo but the rule on selective price-cutting laid in Compagnie Maritime should be considered;
• AVC < Price < ATC – guilty of predation if they’re part of a plan to eliminate a competitor;
• Price < AVC – presumed to be acting abusively, rebuttable over objective justification. 

The Akzo test was reaffirmed in the cases of Tetra Pak II & France Telecom, and further developed in the Post Danmark case, wherein the Court held that pricing below ATC but above AVC is not per se anti-competitive and the point to be considered is whether the pricing policy, without objective justification, produces an actual/likely exclusionary effect to the detriment of competition and thereby of consumers’ interests. 

Intention to eliminate competition

Areeda-Turner test was argued upon its strictness, stating that pricing above AVC could be exclusionary in some circumstances, especially where there is proof of such intent. However, a rule requiring evidence of intention to eliminate would be reasonable where it has an objective quality based in economics. 

Is it necessary to show the possibility of recoupment?

The US law prohibits predatory pricing only if it can be shown that the predator has the ability to recoup any losses incurred. The EU Courts have not adopted a requirement of recoupment under Article 102. It affirmed this in the France Telecom case, by stating that proof of the possibility of recoupment of losses suffered by a dominant firm via price-cutting cannot constitute a precondition for establishing that such a pricing-policy is abusive. However, the Commission is not precluded from finding that this is a relevant factor in assessing abusive pricing practices. 

Defences

There are three kinds of objective justifications available as defences against predatory pricing:

• Meeting competition;
• Objective necessity and efficiency; and
• Product introductions, obsolete inventory and industry downturn.

Are the standards of AVC and ATC always appropriate?

A complex factor in the application of cost-based rules to determine predation is that AVC & ATC standards may not always be appropriate since in some industries fixed costs are very high while variable costs are very low. Consequently, the Commission suggested the use of LRIC models instead, which comes with arguments of its own. Hence, a ‘combinatorial approach’ of LRIC along with the stand-alone costs may be used. The first decision using this model was made in the case of Deutsche Post.

The Commission’s approach to predation in its Guidance on Article 102 Enforcement Priorities

The Commission states that a dominant firm engages in predatory conduct via deliberately incurring losses or foregoing profits in the short-run and causes anti-competitive foreclosure. Its view is that a price below AAC is a clear indicator of profit sacrifice, although avoidable losses would also have to be taken into account. It adds that only prices below LRAIC are capable of foreclosing as-efficient competitors and that disciplining a rival to prevent competition in the market may suffice.  

Predatory price cutting and cross-subsidisation

Cross-subsidisation may facilitate abusive pricing practices such as predation & selective price-cutting, and hence, it has to be determined whether cross-subsidisation is inherently abusive. It appears, in principle, that the existing rules on abusive pricing practices are sufficient to control the conduct of the dominant firms, consequently, the adoption of a rule forbidding cross-subsidy itself is unnecessary.

Selective price-cutting but not below cost

This contentious issue arises when a dominant firm cuts prices selectively, but not below the costs, to customers that might desert the competitor while leaving the prices at a higher level for other customers. This might amount to unlawful discrimination contrary to Article 102(2)(c). 

Eurofix-Bauco/Hilti

The Commission found the defendant guilty of abusing its dominance in a number of ways, such as bundling; quantity discounts to some customers; selective price-cutting; etc. It held that the pricing abuses, in this case, did not hinge on whether the prices were below cost, but on the issue of Hilti’s reliance on its dominance to offer discriminatory prices to its competitors’ customers to damage the other’s business.

Irish Sugar v Commission 

The General Court annulled the finding of the Commission that Irish Sugar had applied selectively low prices to potential customers of a competitor infringing Article 102, on factual grounds; however, it upheld the finding that Irish Sugar had been guilty of granting selective rebates to particular customers.

Compagnie Maritime Belge v Commission

It was held that the policy adopted by Belge was one of selective price-cutting intended to eliminate the competitor and that Article 102 was infringed. Non- discriminatory price cuts by a dominant undertaking which do not entail below-cost sales shouldn’t usually be regarded as being anti-competitive. However, the judgment made it clear that selective price-cutting is capable of being abusive in its own right. 

Post Danmark

• Confirms that selective price-cutting by a dominant firm is cannot be presumed unlawful without a detailed cost-based analysis of its capability of foreclosing competition.
• Departs from a central need to show anticompetitive intent, and underlines the importance of assessing the real risks of foreclosure of an as-efficient competitor.
• Objective justifications on necessities and efficiencies. 

UK Law

Napp Pharmaceutical

It was held that Napp was a super-dominant undertaking and had abused its dominance by charging prices below costs (AVC) to particular customers to ward-off a competitor, and hence, it was unnecessary to determine if this was done under a plan to eliminate competition.  

The Aberdeen Journals case

This case laid down several important points as regards the cost-based rules:

• The rules are not an end in themselves and shouldn’t be applied mechanistically;
• Significance of the time period over which costs are to be calculated;
• Recognition of objective justifications under certain circumstances.
• Intention – in the absence of exceptional circumstances, the longer a dominant firm charges below costs, the easier it will be to draw an inference of intent to eliminate competition.

English Welsh & Scottish Railway

In this case, the Office of Rail Regulation found that EW&S had abused its dominant position in a number of ways, including predatory pricing.

Cardiff Bus

In this case, OFT concurred that Cardiff Bus engaged in predatory conduct intending to eliminate certain rival competitors from the market, but did not impose any fine because of its small turnovers. Subsequently, those companies sued Cardiff bus for damages. 

Cases where predatory pricing was not established

• The Association of British Travel Agents and British Airways plc – OFT concluded that BA was not guilty of abusing its dominant position by reducing the commission it paid to travel agents for the sale of tickets for its flights since there existed an objective justification for this price differential.
• Complaint against BT’s pricing of digital cordless phones – OFCOM held that BT was not dominant. However, it also conducted an extensive analysis of whether it’d have been guilty of predation if it was in a dominant position, and concluded that this was not so.

Margin Squeeze

The economic phenomenon

A margin squeeze occurs when there is such a narrow margin between an integrated provider’s price for selling essential inputs to a rival and its downstream price that the rival cannot survive or effectively compete.

EU Law

Is the accused undertaking operating on an upstream and a downstream market?

The accused undertaking “squeezes” the margin between the price it charges for the input in vertically integrated markets, i.e., the upstream & downstream market, along with the price that its downstream operations charge to its own customers, so as to affect the efficiency of competition.

Does the accused undertaking hold a dominant position in the upstream market?

A vertically integrated undertaking that holds a ‘dominant position in the upstream market’ may cause price squeeze by:

• increasing the price for the upstream product;
• decreasing the price for downstream products; or
• doing both concurrently.

In reference to this, a dominant undertaking may restrict competition in the relevant market via transferring its market power over the upstream products to the downstream market.

Do the dominant firm’s upstream and downstream prices allow an undertaking as efficient as the dominant firm to compete on the downstream market?

In Konkurrensverket v TeliaSonera, the Court while rejecting the test laid down in Deutsche Telekom, held that considering the exclusionary effect a margin squeeze may create for as-efficient competitors, in the absence of any objective justification, it is in itself capable of constituting an abuse within the meaning of Article 102 TFEU. Further, it stated that the insufficient margin created by the dominant firm between its upstream and downstream products is the essence of this infringement.  

Is the margin squeeze capable of producing anti-competitive effects?

In Telefónica S.A. and Telefónica de Espaħa S:A:U: v. Commission, the Court stressed that Article 102 applies only to a margin squeeze that has exclusionary/anticompetitive effects, by stating that during the assessment of abuse the conduct of the dominant firm has to be considered. It held that the Deutsche Telekom case, considering margin squeeze as abusive conduct in itself, was to be regarded as a clear precedent to margin squeeze cases. Moreover, notwithstanding any legislation, if the dominator has the scope to adjust even its retail prices alone, the margin squeeze runs the risk of being considered abusive under Article 102 TFEU

Is there an objective justification for the margin squeeze?

The objective justifications available to a dominant undertaking against margin squeeze are: 

• greater effectiveness must be achieved as a direct result of the reviewed conduct;
• the conduct is necessary to achieve greater efficiency;
• consumers benefit from increased efficiency;
• competition has not been eliminated in a substantial part of the market.

The Commission’s decisional practice

In its Guidance, the Commission discussed its approach to margin squeeze alongside refusal to supply, by stating that it shall generally rely on LRAIC of the dominant firm’s downstream operations to determine foreclosure of as-efficient competitors and that it may use the LRAIC of a downstream competitor whence it is not possible to allocate the costs of a vertically-integrated dominant firm. It has taken action in relation to ‘margin squeezing’ in various cases, such as Napier Brown- British Sugar, Deutsche Telekom and Telefónica.

UK Law

Findings of unlawful margin squeeze

• In Genzyme Ltd., the CAT upheld a finding of margin squeeze against the dominant firm who squeezed the margin available to a competitor in a downstream market and found it guilty of abusing its dominance.  
• In Albion Water/Dŵr Cymru a judgment of the CAT was upheld, overturning a non- infringement decision by OFWAT, and finding that Dŵr Cymru was guilty of margin squeezing.

Rejections of complaints about margin squeezes

In BSkyB, after an extensive economic analysis, it was concluded that there were insufficient grounds for believing that its conduct was abusive, as was highlighted in many other investigations conducted by the OFCOM.

Price discrimination

The meaning of Price discrimination

Price discrimination arises when customers in variant market segments are charged dissimilar prices for the same good/service, for reasons unrelated to costs. It is effective only if customers cannot profitably resell the goods or services to others. 

EU Law

Article 102(2)(c) provides that the application of dissimilar conditions to equivalent transactions leading to foreclosure of competition amounts to abuse.

Does the accused undertaking have a dominant position?

Infringement of Article 102 can occur only if the accused undertaking is in a position of dominance in the upstream market, whereas its presence in the downstream market is unnecessary.

Has the dominant undertaking entered into equivalent transactions with other trading parties?

Article 102 does not necessitate all trading partners to avail the benefit of the same prices but requires examination of differential treatment where the compared transactions are ‘equivalent’, that may be determined via factors such as the nature of the product and the costs of supply. 

Is the dominant undertaking guilty of applying dissimilar conditions to equivalent transactions?

The dominant undertaking must have applied dissimilar conditions to equivalent transactions with other trading parties to constitute an offence of abuse of dominance under Article 102.

Could the discrimination place other trading parties at a competitive disadvantage?

Article 102(2)(c) specifically requires that the infliction of ‘competitive disadvantage’ be a component of the abusive conduct. In British Airways, the Court explicitly stated that it’s necessary to ascertain that the discriminatory behaviour in question tends to distort the competitive relation, either amongst the suppliers or amidst the customers.  

Is there an objective justification for the discrimination?

A dominant firm may take a defence of objective justification as it is believed that differential pricing may increase a dominant firm’s output and enable customers to obtain a product which they might not be able to afford otherwise.

UK Law

In the EW&S case, the ORR held the firm to be guilty of abusive dominance in a number of ways, including price discrimination between customers. Whereas, in BSkyB, the OFTEL concluded that any discrimination on the dominant firm’s part as regards the promotion of its broadband services did not have a material effect on competition.

Pricing practices that are harmful to the single market

The EU Law condemns pricing practices of dominant firms that are harmful to the single market. 

Excessive pricing that impedes parallel imports and exports

 High prices charged to prevent parallel imports infringe Article 102. In the BL case, the Court while condemning the disproportionate pricing, found that the purpose of excessive pricing was to impede parallel imports into the UK, which should be accounted for via single-market considerations. 

Geographic price discrimination

Geographical price discrimination was condemned in the case of Tetra Pak II, wherein the relevant geographic market was the whole EU and yet considerably variable prices were charged amongst different States, which was possible because of its policy of market compartmentalisation maintained by virtue of its other abusive practices. 

Rebates that impede imports and exports

Rebates and similar practices that have the effect of impeding imports & exports are condemned by the EU law. The decision in Irish Sugar was prompted by single-market considerations wherein border rebates were held unlawful, and the importance of the competitive influence on one national market from neighbouring markets was highlighted as the very essence of an internal market. 

Conclusion

Competition law has been extensively relied upon in cases of abusive pricing practices. Hence, in the modern era, it is suggested that the antitrust authorities, instead of aiming at direct regulation of prices, etc., focus on the preservation of structures & conditions whereby market forces constrain price and increase output, and hence, that the Commission uses its powers with great parsimony while the Courts set high standards of proof. 

References

• Wang, X. Henry, and Bill Z. Yang. “Fixed and Sunk Costs Revisited.” The Journal of Economic Education, vol. 32, no. 2, 2001, pp. 178–185. JSTOR, www.jstor.org/stable/1183493.
• RICHARD WHISH & DAVID BAILEY, COMPETITION LAW, (8th ed.).
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• Post Danmark A/S v Konkurrencerådet, (C-209/10).
• Eurofix Bauco v. Hilti, OJ [1988] L 65/19, [1989] 4 CMLR 677.
• Irish Sugar plc v Commission of the European Communities, OJ [1997] L 258/1, [1997] 5 CMLR 666.
• Compagnie Maritime Belge SA v Commission of the European Communities, [1995] 5 CMLR 198.
• Aberdeen Journals Ltd. v. OFT, [2001] UKCLR 856.
• EW&S Railway Ltd, [2007] UKCLR 937.
• 2 Travel v. Cardiff Bus, [2012] CAT 19.
• Konkurrensverket v TeliaSonera,  [2011] ECR I- 000.
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• Genzyme Ltd v. OFT, [2003] UKCLR 950.
• Dŵr Cymru Cyfyngedig v Water Services Regulation Authority [2008] EWCA Civ 536, [2008] UKCLR 457.

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Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.