General presentation on dominant position and abuse thereof.

1. Dominant position
Julija Jerneva

2. Art. 102 TFEU
"Any abuse by one or more undertakings of a dominant position
within the common market or in a substantial part of it shall be
prohibited as incompatible with the common market in so far as it
may affect trade between 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."
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3. Definition of dominance
• Dominance not defined in Treaty, but in case law.
• Dominance must be in reference to a relevant market (product
+ geographical).
• Market share is the most important indicator but not
determinative.
• Therefore market definition is essential.
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4. Market shares
4
0% 100%
DominantUnlikely
dominant
30% 50–70%

5. Dominant position
• dominance is a position of economic strength enjoyed by an
undertaking which:
• enables it to prevent effective competition being maintained on the
relevant market
• during sufficiently long period of time
• by affording it the power to behave to an appreciable extent
independently of:
• its competitors,
• its customers and
• ultimately of the consumers

6. • Dominance means substantial market power over a period of
time.
• If can profitably maintain prices above the competitive level for
a significant period of time, then generally dominant.
• Indicators: market shares (firm & rivals), entry and expansion
by rivals, countervailing buyer power.
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7. Collective dominance
• Two or more undertakings must from an economic point of view
present themselves or act together on a particular market as a
collective entity
• Undertakings in oligopolistic markets?
• Collusive behaviour?

8. Case 85/76 Hoffmann-La Roche
• ”An objective concept relating to the behaviour of an
undertaking in a dominant position which is such as to
influence the structure of a market where, as a result
of the very presence of the undertaking in question, the
degree of competition is weakened and which,
through recourse to methods different from those
which condition normal competition in products or
services on basis of the transaction of commercial
operators, has the effect of hindering the
maintenance of the degree of competition still
existing in the market or the growth of that
competition.”

9. Pricing and non-pricing abuses
• Pricing related: predatory pricing, margin squeeze, discount
schemes
• Non pricing conduct includes: refusal to supply, exclusive
dealing, tying and bundling
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10. Exclusionary and exploitative abuses
• Exclusionary abuses: those, which aim to exclude existing or
potential competitors
• Exploitative abuses: dominant undertaking exploits its dominant
position to its own benefit

11. • only conduct which would exclude a hypothetical “as efficient”
competitor is abusive

12. Horizontal foreclosure
• a dominant company attempting to exclude, discipline or
marginalise a rival at its own level in the supply chain by
foreclosing its access to customers

13. Horizontal foreclosure
A B
A2 C

14. Vertical foreclosure
• the aim is to exclude B, a rival of A in the upstream market, or
• the aim is to exclude an already active or a potential participant
in the downstream market, for instance Z

15. Pricing abuses

16. Pricing – The “core” of Competition Law
Ronald Coase [1991 Nobel Prize in economics] said he was
tired of competition law because “when the prices went up the
judges said it was monopoly, when the prices went down they
said it was predatory pricing, and when they stayed the same
they said it was tacit collusion”
Source: William Landes in "The Fire of Truth: A
Remembrance of Law and Econ at Chicago", JLE
(1981) p.193.

17. A Two-Tier Approach to Pricing
• First tier – ex ante sector specific regulation: wholesale and
retail prices may be subject to regulatory oversight
• Second tier – ex post EC competition law: prices are
occasionally subject to regulatory intervention. Besides anti-cartel
provisions (Article 101 EC), dominant firms’ pricing policies are
subject to the prohibition of abuse of a dominant position
contained in Article 102 EC

18. High prices Customers
exploitation
Excessive pricing Art.
102(a)
Low prices Competitors exclusion Predatory pricing and
abusive rebates Art.
102(b)
High prices
(wholesale) + low
prices (retail)
Downstream
competitors exclusion
Abusive margin
squeeze Art. 102 (b)
Differentiated prices Customers exclusion Price discrimination
Art 102(c)
Business
practice
Harmful
economic
effect
Legal
qualification

19. Price = (?) “costs” (+ “profits”)
• sunk costs
• fixed costs
• variable costs
• total costs
• marginal/incrimental costs
• avoidable costs
• average costs
• Diversified production: stand alone costs and common costs

20. • can a competitor, which is as efficient as the dominant
company, can compete against the price schedule or rebate
system of the dominant company?
• whether the dominant company itself would be able to survive
the exclusionary conduct in the event that it would be the
target?

21. • reliable information on the pricing conduct and costs of the
dominant company?

22. Excessive pricing

23. Excessive (or “unfair”) pricing
• Originality of EC competition law. Other competition law
regimes have chosen to “trust” the market: high prices are
short lived as they trigger entry of new firms. In the long run,
high prices lead to increased competition in the market place
• Enforcement limited to exceptional circumstances:
1. Typically in exorbitant situations where price exceed at least
from 100% the costs of the dominant firm. A price simply in
excess of the competitive level will not trigger intervention
2. Cases often involving a market partitioning problem (see the
United Brands, General Motors, British Leyland cases)

24. Excessive pricing – Legal Standard
• Definition: “[c]harging a price which is excessive
because it has no reasonable relation to the economic
value of the product supplied” (United Brands);
• Test: “determine whether the difference between the
costs actually incurred and the price actually charged is
excessive; and if the answer […] is in the affirmative,
whether a price has been imposed which is either unfair
in itself or when compared to competing products”;
• Commission’s practice: four methods have been used
(i) price-cost margin analysis; (ii) price comparisons
accross markets or competitors; (iii) geographic price
comparisons; (iv) comparisons over time.

25. The Deutsche Post II case
• Allegation that DP has abused its dominant position by charging an
excessive price for the delivery of incoming international mail. DP Post
classifies IIM as circumvented domestic mail and charges the full
domestic tariff (0,56 €).
• Commission confronted with an “information” problem
No cost benchmark available in a monopolistic market: “In a market which
is open to competition the normal test to be applied would be to compare
the price of the dominant operator with the prices charged by competitors.
Due to the existence of DPAG's wide-ranging monopoly, such a price
comparison is not possible in the present case”;
No reliable information on costs: DP had not set a “transparent, internal
cost accounting system and no reliable data exist for the period of time
relevant to this case”.
• By charging the full domestic tariff (0,56€) for delivery of international
mail, DP has exceeded by +/– 25% the economic value of the service
(0,45€);
• Importantly, the Commission indicates that an excess of only 25% may
be deemed abusive by virtue of the facts that (i) DP is a monopolist
and; (ii) of the special features of the postal sector (e.g. liberalization
policy initiatives).

26. Single branding and Discount schemes

27. Negative effects
• Foreclosure of the market to competing suppliers and potential
suppliers
• If the buyers are retailers selling to final consumers the
foreclosure may also lead to a loss of in-store inter-brand
competition
• Price discrimination between the different buyers (competitors
in the downstream market)

28. Single branding
• obligations which require the buyer on a particular market to
concentrate its purchases to a large extent with one supplier
• ‘English clause’, requiring the buyer to report any better offer
and allowing it only to accept such an offer when the supplier
does not match it

29. Unconditional rebates
• Unconditional rebates, while granted to certain customers and
not to others, are granted for every purchase of these
particular customers, independently of their purchasing
behaviour
• exploitative abuse only

30. • Unconditional rebates are only problematic where used as a
predation means:
• the dominant firm selectively eliminates key sources of demand for
actual and potential competitors to prevent market entry.

31. Conditional rebates
• Conditional rebates are granted to customers to reward a
certain (purchasing) behaviour of these customers
• Conditional Rebates are generally problematic.

32. Incremental and all-unit
• incremental rebates (only bear on purchases above the
threshold)
• have a lesser anticompetitive effect
• “all-unit” rebates (bearing on all purchases achieved during the
reference period)

33. “all-unit” rebates
• produce a “suction effect”, as reaching the target
awards a discount on all units purchased up to that point
and not only on purchases above the target.
• Such rebates have the effect of pre-empting a share of
the market that may be critical for rivals’ and new
entrants’ abilities to compete with the dominant firm.
• In discouraging customers from placing orders with rival
producers, all unit rebates are said to be “fidelity-
building” (legality depends on assessment of the market
share covered by the rebates, size of the rebates, level
of the threshold, duration of the reference period, etc.)

34. The De Post/Hays Case
• The Belgian postal operator De Post La Poste offered a
“preferential tariff” for the general letter mail service
subject to the acceptance of a supplementary contract
covering a new business-to-business ("B2B") mail service
• Hays, a competitor active on the B2B document exchange
network market, could not compete with the tariff
reduction offered by La Poste in the monopoly area and
was losing most of its clients in Belgium
• By tying the tariff reduction in the monopoly area to the
subscription of its B2B service, La Poste made it
impossible for Hays to compete on a level playing field
because it could not offer a similar advantage
• Form of bundled rebates/financial tying typically
prohibited under Article 102(d).

35. Efficiency enhancing effects
• the supplier, in order to supply a particular customer, makes a
relationship specific investment

36. Intel: rebates case
• Case COMP/37.990
• Financial consequences:
• Fine: € 1.06 billion (largest fine on single firm, but only(?) 4.15% of the
turnover)
• Settlement with AMD: $ 1.25 billion to be paid
• Facts:
• Dominant position by Intel between October 2002-December 2007
• Relevant market: x86 Central Processing Units (CPU) worldwide market (at
least 70% market share)

37. Intel: types of abuses
1. Wholly or partially hidden rebates to computer manufacturers on
condition that they bought all, or almost all, their x86 CPUs from
Intel
2. Direct payments to Europe’s largest PC retailer (MSH) on condition
that it stocked only computers with x86 CPUs
3. Direct payments to computer manufacturers to stop or delay the
launch of specific products containing a competitor’s x86 CPUs
and to limit the sales channels available to these products

38. Predatory pricing

39. Predatory pricing
• the practice where a dominant company lowers its price and
• thereby deliberately incurs losses or foregoes profits
• in the short run
• so as to enable it to eliminate or discipline one or more rivals or to
prevent entry by one or more potential rivals thereby hindering the
maintenance or the degree of competition still existing in the market or
the growth of that competition

40. Predatory pricing – Legal Standard
if the dominant firm prices are set below Average Variable Costs
(AVC), unlawful predation is presumed. Pricing below AVC has no
economic rationale other than the elimination of competitors, since
every unit sold is a net financial loss

41. Pricing below average avoidable cost
• Whether the dominant company:
• by charging a lower price for all or a particular part of its output
• over the relevant time period,
• incurred or incurs losses
• that could have been avoided by not producing that (particular part of its) output
• If such avoidable losses are incurred, the pricing can be
presumed to be predatory

42. Pricing above average avoidable cost but
below average total cost
• Many reasons: i.e., serious fall in demand
• No presumption

43. Pricing above average avoidable cost but
below average total cost
• If the dominant firm’s prices are set above AVC but below
Average Total Costs (ATC), unlawful predation can only be
established on the basis of additional evidence.
• Firms may, in certain circumstances, rationally price above AVC
and below ATC, as it still allows the recovery of a share of their
fixed costs.
• As predation is not the sole economic rationale for such a pricing
policy, competition authorities are required to produce additional
elements of proof: prices below ATC “will be regarded abusive if
they are determined as part of a plan for eliminating a competitor”

44. Long run average incremental costs
• In specific sectors
• LRAIC is used as a benchmark
• it is presumed that pricing below LAIC is predatory

45. A different cost standard for network
industries
• Some economists consider that using the Long Run Incremental Costs
(“LRAIC”) benchmark would be better suited:
In sectors with high fixed costs and low variable costs a price
may well equate with AVC – and thus not be prima facie predatory –
and still be substantially lower than the price the firm needs to cover
the cost of supplying its products and thus be de facto predatory. To
address the problem, the Commission has suggested the use of a
LRAIC benchmark. The LRAIC covers all the costs incremental to
the production of the product at hand, including fixed and variable
costs.
In sectors where dominant firms sell more than one
product/service. A difficult issue is how to allocate fixed and
variable costs that are incurred in common with two or more
products. A solution often supported by economists is to ignore the
common costs, and focus only on the costs that are incremental to
the production of the specific service at hand.

46. Above cost pricing
• Price cuts above ATC are in principle not predatory, as they can only
lead to the exclusion of less efficient competitors only or deter
inefficient entrants
• Yet, the case-law and the Commission’s decisional practice recognize
that in “exceptional circumstances” dominant firms may breach Article
82 EC for selectively undercutting the prices charged to certain
customers by competitors, with a view to excluding or deterring the
entry of such competitors
• The Discussion Paper indicates that “exceptional circumstances” will
arise where the dominant firm has certain non-replicable advantages
or where economies of scale are very important and entrants
necessarily will have to operate for an initial period at a
significant cost disadvantage. Because entry can practically only
take place below the minimum efficient scale. This factor could be
relevant for network industries and the postal sector
• Commission has stressed that an abuse will only be found in situations
where the price cuts have lead or will lead to “substantial” consumer
harm

47. Price discrimination

48. Discrimination
Producer B Producer C
Sales price 200 400
Sparkling wine producer B
(A group company)
Sparkling wine producer C
Wine material producer (A)

49. Price Discrimination – Legal Standard
• First condition: applying dissimilar prices to “equivalent
transactions”
Often uneasy to determine whether transactions are equivalent. Most
obvious reason for stating that two transactions are not equivalent is
that the sales involve different costs for the seller. The problem is of
course to determine how significant cost differences should be for two
transactions to be considered non-equivalent
European commission generally assume that transactions are
equivalent without much analysis

50. Price Discrimination – Legal Standard
• Second condition: the dominant firm’s trading parties must
be placed at a competitive disadvantage against others
Need to identify a downstream relevant market;
Need to show a distorsion of competition on that market
European Commission generally ignores these conditions

51. Margin squeeze

52. Margin squeeze
• No discrimination!

53. Test
•Four conditions:
(i) input supplier is vertically integrated;
(ii) input is essential;
(iii) the price charged would prevent an efficient competitor from
making a normal profit;
(iv) there is no objective justification for this pricing strategy;

54. Producer B Producer C
Purchase price (PP) 40 40
Min. production costs (MinPC) 40 40
Max competitive retail price (MaxRP) 100 100
Profit (P = MaxRP – PP – PP) 20 20
Sparkling wine producer B
(A group company)
Sparkling wine producer C
Wine material producer (A)

55. Producer B Producer C
Purchase price (PP) 60 60
Min. production costs (MinPC) 40 40
Max competitive retail price (MaxRP) 100 100
Profit (P = MaxRP – PP – PP) 0 0
Sparkling wine producer B
(A group company)
Sparkling wine producer C
Wine material producer (A)

56. Producer B Producer C
Purchase price (PP) 90 90
Min. production costs (MinPC) 40 40
Max competitive retail price (MaxRP) 100 100
Profit (P = MaxRP – PP – PP) -30 -30
Sparkling wine producer B
(A group company)
Sparkling wine producer C
Wine material producer (A)

57. • Incentives to engage into margin squeeze is not clearcut.
Trade-off for a dominant input supplier:
Limitation of downstream competition vs. loss of
upstream revenues

58. Non-pricing abuses
• exclusive dealing (single branding)
• refusal to supply
• tying and bundling
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59. Bundling and tying

60. Tying
• A (tying product) not sold without B, but B (tied product) is also
sold separately
• the supplier makes the sale of one product (the tying product)
conditional upon the purchase of another distinct product (the tied
product) from the supplier or someone designated by the latter.
• Only the tied product can be bought separately

61. Bundling
• A package of two or more goods is offered
• Pure bundling: Bundle A-B: neither A nor B is sold separately
• Mixed bundling: A-B: both sold individually, but together for a
discount.
• The bundled goods may be available for individual purchase, but the
bundle is sold at a discount to the sum of the prices of the components

62. Bundling and tying
• pure bundling:,
• tying:,
• mixed bundling:
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63. Different forms of tying
• contractual tying: tie agreed or dominant party refuses to sell
separately
• technological tying: tying product cannot function without tied
product: touches on separate products question. If not, no tying
or bundling
• commercial tying: mixed bundling if bundle discount forces
customer to buy bundle
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64. Discounts with T&B effects
• Discounts with T&B effects
• But: effectiveness (common costs?)

65. T&B extremely common business practices
(undisputed)
• applied by small and large firms (see Discussion Paper and
Microsoft).
• many (if not most) not dominant in any market.
• Valid reasons to bundle: efficiencies, price-discriminate
differentiate product portfolio.
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66. Leveraging of market power
• T&B by dominant firms can be anticompetitive:
• transferring market power in market A into a adjacent market B, or
• maintaining or strengthening the existing market power in market A.
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67. Test
• the company concerned is dominant in the tying market
• the tying and tied goods are two distinct products
• the tying practice is likely to have a market distorting
foreclosure effect
• the tying practice is not justified objectively or by efficiencies
17

68. Lattelecom “Mājas komplekts 1”
• Internet + Fixed telephony services = free local calls and cheap calls
abroad

69. Microsoft: PC operating systems case
• Case COMP/39.530
• Automatic tying of 'Internet Explorer' web browser to the 'Windows'
computer operating system
• deprives consumers of choice
• results in fewer innovative products on the market
• January 2009: the Commission’s preliminary view that the company
abused its dominant position in the market for client PC operating
systems through the tying of Internet Explorer to Windows

70. Microsoft: PC operating systems case
• As of March 2010: browser “Choice screen”
• "Choice Screen" enables users (from EEA) of Windows XP, Windows Vista and
Windows 7 to choose in an informed and unbiased manner which web
browser(s) they want to install in addition to, or instead of, Microsoft's web
browser
• Same applies to users, who receive an automatic update
• Available for 5 years
• 16 December 2009: Commission’s commitment decision

71. Microsoft: PC operating systems case
• Mr. Nitot, president of Mozilla Europe (27.10.2009): “In 17
countries of Europe, Firefox is now the dominant browser, and
the browser is particularly popular in Eastern Europe”
• Firefox was launched in 2004, i.e. when Microsoft was allegedly
foreclosing the market

72. Refusal to supply

73. • Undertakings (also dominant) are generally entitled to
determine whom to supply and to decide not to continue to
supply certain trading partners

74. Refusal to supply: horizontal foreclosure
• Aimed at excluding the competitor of the dominant company
• halting supplies to punish buyers for dealing with competitors
• refusing to supply buyers that do not agree to exclusive dealing or
tying arrangements

75. Refusal to supply: vertical foreclosure
• a dominant company denies a buyer access to an input in order
to exclude that buyer from participating in an economic activity
• the termination of an existing commercial relationship
• the refusal to supply products, to provide information, to license
intellectual property rights (IPR)
• the refusal to grant access to an essential facility or a network.
• Free riders?

76. RWE Group: German gas supply case
• Case COMP/39.402
• RWE may have abused the dominant position on its gas transmission
network to restrict its competitors' access to the network
• Types of abuses:
• Capacity management: systematically keeping the transport capacity on its
gas network for itself
• Margin squeeze: setting transmission tariffs at an artificially high level with
the effect of preventing even a competitor as efficient as RWE from
competing effectively on the downstream gas supply markets or limiting
competitors' or potential entrants' ability to remain in or enter the market

77. RWE: commitments
• RWE committed to divest its entire Western German high-pressure
gas transmission network, including the necessary personnel and
ancillary assets and services
• Competition Commissioner Neelie Kroes commented: "This very
substantial set of remedies will fundamentally change the landscape
of German gas markets…RWE will no longer be able to use the control
of its network to favour its own gas supply affiliate over its
competitors."

78. Thank you!
• Julija Jerneva
• Mobile: +371 29131597