Hareesh Gupta, Advocate, Gauhati High Court
I. Meaning – Abuse of dominant position
A firm or company will generally be considered to be dominant if it is able to act without taking account of reactions of the customers and competitors. Abuse of dominant position occurs where a firm holds a position of such economic strength that allows it to operate in the market without being significantly affected by competition and it engages in conduct that is likely to impede the development or maintenance of effective competition.
Sec. 4(1) of the Indian Competition Ac, 2002 states that, “No enterprise shall abuse its dominant position”. Further Sec 4 (2) classifies the circumstances under which there shall be abuse of dominant position by an enterprise of group. As the relevant provisions in this context have been given effect recently in May, 2009, the position on this point is unclear and provisions of the other countries and decisions by MRTP commission must be looked into, to determine the same.
Article 82 of the European Commission Treaty provides that, “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.”
Sec. 18 (1) of the Competition Act, 1998 of U.K. provides that, “any conduct on the part of one or more undertakings which amounts to the abuse of a dominant position in a market is prohibited if it may affect trade within the United Kingdom.” The Office of Fair Trade in the UK notes in its Draft Guidelines on Competition Act that this must be viewed against the background of a properly defined relevant market. This requires assessment of the goods or services which form part of the market (the product market) and the geographic extent of the market.
Section 19 (1) of the German Act against Restraints on Competition’ states, “The abusive exploitation of a dominant position by one or several undertakings shall be prohibited.” German Law traditionally controlled single firm misconduct through specific rules. Making the rule against “abusive exploitation of a dominant position” a general prohibition is a recent innovation. While the Indian law prohibits abuse of dominant position by enterprises in general, the German law prohibits the “abusive exploitation of a dominant position”. The law of the United Kingdom and the EC law prohibit abuse of dominant position in the ‘market’ or ‘common market’ respectively, in so far as it may or if it may affect trade ‘within the United Kingdom’ or ‘between the member states’ respectively.
The Trade Practices Act, 1974 of Australia does not prohibit the “abuse of dominant position”. The provision corresponding to abuse of dominance in this Act is “misuse of market power” and provides that undertakings having a ‘substantial degree of power in the market’ cannot take advantage of such power for certain specified purposes. There is no general prohibition on misuse of market power by an undertaking having a ‘substantial degree of market power’ in the relevant market.
Again, under the Antitrust laws of the United States, the expressions “dominance” or “abuse of dominance” are not used. The corresponding concept under that law is of ‘monopoly’ and ‘attempt to monopolize’. Section 2 of the Sherman Act states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and..” This section addresses the actions of single firms that monopolize or attempt to monopolize as well as the conspiracies and combinations that attempt to monopolize.
II. Stages in determining whether an Enterprise is in a Dominant Position
a) Relevant Market:
First stage is defining the relevant market (the relevant product market and the relevant geographical market). In India Sec. 19(5) of the Competition Act, 2002, “For determining whether a market constitutes a “relevant market” for the purposes of this Act, the Commission shall have due regard to the “relevant geographic market” and “relevant product market”. The definition of relevant market provided by Section 2(r) of the Act also states that the relevant market means the market that may be determined by the Commission with reference to the relevant product market or the relevant geographical market or with reference to both. “Relevant product market” and “Relevant geographic market” have been specifically defined in the Indian Competition Act.
The Product Market
The market is determined by taking the product (or service) relevant to the investigation – the focal product – and looking at the closest substitute products, usually those products to which consumers would switch, if the price of the focal product rose. These substitute products are included in the same market as the focal product if customers would switch to them in sufficient volumes in response to the hypothetical situation where the price of the focal product is sustained significantly above competitive levels. The alternative products do not need to be perfect substitutes for the focal product, but alternatives which would fill a similar role to the focal product. It is the smallest set of products (both goods and services) which are substitutable among themselves, given a small but significant non-transitory increase in price (SSNIP). Section 2(t) defines the ‘relevant product market’ as a market comprising all those products or services which are regarded as interchangeable or substitutable by the customer, by reason of the characteristics of the product or service, the prices and the intended use.
The price of the focal product can also be constrained by the potential behaviour of suppliers producing other products (supply-side substitution). This might occur where businesses which are not currently supplying the focal product could, at short notice, switch some of their existing facilities to supplying the focal product (or close substitutes) in response to prices of the focal product being sustained significantly above competitive levels. Where such switching would occur within one year and without substantial sunk cost,, supply-side substitutes may also be included in the relevant market. Following factors must be considered while determining relevant product market:
1) Physical characteristics of product,
2) End-use of product,
3) Price,
4) Consumer preference
The Geographic market
Relevant geographic market can be defined as the area in which products are available at approximately the same price given transport costs and any increase in demand can be met from neighbouring areas profitably. Section 2 (s) defines the ‘relevant geographic market’ as a market comprising the area in which the conditions of competition for supply of goods or provision of services are sufficiently homogeneous and can be distinguished from the conditions prevailing in neighbourhood areas. Following factors must be considered in order to determine the relevant geographic market.
1. Regulatory trade barriers
2. Local specification requirements
3. National procurement policies
4. Adequate distribution facilities
5. Transport costs
6. Language
7. Consumer preferences
8. Need for secure or regular supplies or rapid after-sales services
The American Courts also emphasized the importance of first defining the relevant markets, taking into account both the product and geographic aspects. In cases such as Walker Process Equipments Inc. v. Food, Machinery and Chemical Corp. 382 US 172, it was observed that without a definition of the relevant market, there is no way to measure the defendants’ ability to lessen or destroy competition. In Ilan Golan v. Pingel Enterprises Inc (decided 7th Nov 2002), it was observed citing the case of Thurman Industries v. Pay N Pack Stores Inc 875 F. 2d 1369 (9th Circuit) that defining relevant market is indispensable to a monopolization claim under section 2 of the Sherman Act. In Image Technical Services Inc v. Eastman Kodak Co US Court of Appeals (9th Circuit), the court observed that “The relevant market is the field in which meaningful competition is said to exist. Generally, the relevant market is defined in terms of product and geography”.
The European Court of Justice has in a number of decisions such as Hoffman La Roche v. Commission of the European Communities in case 85/76 (1979), NV Nederlandsche Banden Industrie Michelin v Commission of the European Communities, Oscar Bronner GMBH (1983) observed that it is essential to define the relevant market and it must be defined both from the geographical and the product points of view. The office of Fair Trading in U.K prescribes the ‘hypothetical monopolist test’ to determine the market:
– would a hypothetical monopolist of given products maximize his profits by consistently charging higher prices than it would if faced with competition ?
– Are there other products which consumers can buy instead of those of the hypothetical monopolist?
– If there are then those consumers could swap to other products and this would act as a check on the prices of the monopolist. If there are not then the hypothetical monopolist is likely to be dominant.
The Office of Fair Trading keeps applying its test to each level of a potential market until it reaches a point where the monopolist would not be able to continue to increase its prices—at which point it is outside the relevant market on which it is dominant.
b) Existence of Dominant position:
The second is determining whether the concerned undertaking is in a dominant position or has a substantial degree of market power or has monopoly in that relevant market. The general definition of dominant position or market power followed in jurisdictions such as the European commission, United Kingdom, Australia, Germany and India take into account the ability of the firm or enterprise to behave independently of its competitors and absence of competition or constraint from the conduct of the competitors.
Under the MRTP Act, 1969 to determine whether an undertaking was in a dominant position following arithmetic formula was used: “An undertaking which by itself or along with interconnected undertakings produces, supplies, distributes or otherwise controls not less than one-fourth of the total goods that are produced, supplied or distributed in India or any substantial part thereof, or an undertaking which provides or otherwise controls not less one fourth of the services that are rendered in India or any substantial part thereof. Under the new competition Act, 2002 there is no such arithmetic formula to determine the dominant position of an enterprise. The competition Act, does not say that dominant position is bad as such, but only the abuse of it is bad. Dominance of an enterprise is to be judged by its power to operate independently of competitive forces or to affect its competitors or consumers in its favour. Explanation (a) to Section 4 of the Indian Competition Act defines dominant position as “dominant position means a position of strength, enjoyed by an enterprise, in the relevant market in India, which enables it to-
(i) operate independently of competitive forces prevailing in the relevant market or
(ii) affect its competitors or consumers or the relevant market in its favour.
Thus, an enterprise with a share of say less than 25% of the market could possibly be determined to be the dominant if it satisfies the above criteria; on the other hand, an enterprise with higher market share may not be considered as dominant if it does not meet the criteria mentioned in the Act. Larger market share is alone not indicative of substantial degree of market power there are other factors such as analysis of barriers to entry to the relevant market, the characteristics of the product, and the relationships between the corporations, including the presence of both vertical and horizontal arrangements. Indian Act states under Section 19(4) that the Commission may have regard to certain factors for determining whether an enterprise is in a dominant position.
· Market share of the enterprise
· Size and resources of the enterprise
· Size and importance of competitors
· Commercial advantage over competitors
· Service network
· Dependence of consumers
· Dominant position as a result of statute or Govt Company.
· Entry barriers
· Countervailing buying power
· Market structure
· Contribution to economic development and
· Any other factor
In case an enterprise is held by the Competition Commission of India to have abused its dominant position, there are penalties that can be imposed and various directions that can be given by the Commission. It can impose a penalty of not more than 10% of the turnover of the enterprise. It can pass a cease and desist order, and pass such other orders as may be considered appropriate. It can also recommend to the Central Government for division of dominant enterprise.
Under European Law a dominant market position is ‘……a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers’. In United Brands v. Commission [1978] ECR 207, it was held that a business is dominant if it can behave “to an appreciable extent independently of the competitors and customers and ultimately of consumers.” In Akzo Chemie BV v. European Commission 1986 ECR 1965, the European Court of Justice observed that “Market share, while important, is only one of the indicators from which the existence of a dominant position may be inferred. Its significance in a particular case may vary from market to market according to the structure and characteristics of the market in question”. If the barriers to expansion faced by rivals and to entry faced by potential rivals are low, the fact that any one undertaking has a high market share may not be indicative of dominance.However, in U.K there is a rebuttable presumption in the case of company holding market share of 40-50 % to be considered as holding dominant position and there is no likelihood of creating dominant position in case of holding 20-25 % of market share.
In the context of the United States it has been observed that market shares have been used as one index or screen of market power but other factors such as barriers to entry, availability of substitutes, the number and size of competitors, and the nature of the product are also considered in determining whether or not a firm has substantial market power. In Image Technical Services Inc v. Eastman Kodak Co US Court of Appeals (9th Circuit), the court observed that “To demonstrate market power by circumstantial evidence, a plaintiff must: “(1) define the relevant market, (2) show that the defendant owns a dominant share of that market, and (3) show that there are significant barriers to entry and show that existing competitors lack the capacity to increase their output in the short run. Under US law, market shares of above 70 per cent have been held to constitute ‘monopoly power’. However, where the market shares fall in the middle range (for e.g. between 50-70 per cent), the decisions have been mixed.
c) Identification of specific harmful conduct or what constitutes abuse of Dominant position:
The third stage is determination of whether the undertaking in a dominant position has engaged in conducts specifically prohibited by statute or amounting to abuse of dominant position or attempt to monopolize under the applicable law. The philosophy guiding competition analysis’ have shifted over the years from, treating the structure as per se bad to treating certain type of conduct as bad to treating acts based on their ‘effects on competition’. Competition Act, 2002 takes action upon those acts that have ‘appreciable adverse effect on competition (AAEC) this is the touchstone.
‘Abuse of dominance’ is not defined in most competition laws. However, many competition laws enumerate some conducts which, if engaged in by an enterprise in a dominant position as amounting to abuse of dominance. In India Sec. 4(2) of the Competition Act, 2002 specifies the act which can be considered as abuse of dominant position. These are almost similar to the one provided in Article 82 of the EC Treaty, Sec. 18(2) of the Competition Act of U.K and the Draft guidelines of Office of Fair Trading, U.K for determining abuse of dominant position. These are:
(i) Imposition of unfair or discriminatory condition in the purchase or sale of goods or services or their prices; [Sec. 4(2) (a)]
(ii) Limiting or restricting production or technical development of goods or services to the prejudice to the consumers; [Sec. 4(2)(b)]
(iii) Practices leading to denial of market access in any manner [Sec. 4(2) (c)]. Any practice by the dominant enterprise which forecloses the market access to other market players or deter entry to new players shall be considered as abuse of dominant position by the Commission.
(iv) Conclusion of contract subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; [Sec. 4(2) (d)].
(v) Using dominant position in one relevant market to enter other relevant market as abuse of dominant position [Section (4) (2) (e)]
One difference between the UK Act, EC Law and the Indian Act is that according to the UK and EC laws, the conducts specified may amount to abuse dominant position whereas according to the Indian Act the conducts specified shall amount to abuse of dominance”. It needs to be mentioned herein that the list of abuses provided in the Act are exhaustive, no action can be taken if an action is not covered in abuse. No concession is to be provided in case of abusive use of intellectual property. Therefore, broadly abuse of dominance can be classified into two types:
a) Exploitative abuse: Here the needs of the customers as well as consumers are ignored.
b) Exclusionary abuse: Here the competitors are driven out of the market.
The Australian Trade Practices Act does not expressly mention any conducts that are prohibited but only mentions the purposes for which a corporation is not to take advantage of the ‘substantial degree of market power’ that it has in the relevant market. Section 46 (1) of the Trade Practices Act states “A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market”.
Denial of market access has been specifically mentioned as amounting to abuse of dominance in the Indian and Australian Laws although the expressions used differ (Indian Law- Denial of market access and Australian law- preventing the entry of a person into that or other markets).
In the laws of the United States, as mentioned above there is no concept of abuse of dominant position and what is prohibited is monopoly or attempt to monopolize. It may be noted that under the Sherman Act, no specific conducts have been enumerated which are not to be engaged in by undertakings having monopoly power or in their attempt to monopolize. In American Tobacco Co. v. United States,it was observed that “The phrase ‘attempt to monopolize’ means the employment of methods, means and practices which would, if successful, accomplish monopolization, and which, though falling short, nevertheless approach so close as to create a dangerous probability of it, which methods, means and practices are so employed by the members of and pursuant to a combination or conspiracy formed for the purpose of such accomplishment”.
In United States v. Grinnell Corp 384 U.S. 563 (1966), it was observed, “The offence of monopoly under 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the wilful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. This observation has been cited and followed in a number of cases such as American Professional v. Harcourt (9th Circuit), Ilan Golan v. Pingel Enterprises Inc (decided 7th Nov 2002), Aspen Skiing Co. v. Aspen Highlands Skiing Corp 472 US 385 (1985) and Eastman Kodak Co. v. Image Technical Services Inc. 504 US 451 (1992).
III. Common Types of Abuse by Dominant Firm
Law on abuse of dominant position (like in Canada, the U.S., or the E.U, for instance) are concerned with exclusionary practices such as vertical restraints (e.g. exclusive purchase or supply agreements) and predatory pricing. In fact there are three broad category of abusive behaviour that can be identified.
a) foreclosure behaviour, whereby dominant incumbent prevents the entry to the market of new competitors (e.g. exclusive dealing arrangements)
b) predatory practices, whereby a dominant company attempts to force its competitors to exit the market (e.g. predatory pricing); and
c) exclusionary conduct, whereby a dominant company uses (and abuses) its market power to discriminate between its suppliers or buyers, thus gaining an unfair advantage in order to extract abnormal rents (e.g., tying and bundling treatment of competitors)
Some of the common forms of abuse of dominant position includes:-
a) Predatory pricing [Sec. 4(a) of the Competition Act, 2002] –
Predatory pricing is a deliberate strategy usually adopted by a dominant firm by setting its price very low often below the costs of production for a sufficient period of time, with the intention of forcing competitors out of the market so that it can establish a monopoly type position and charge higher prices in the future to gain super normal profits. There seems nothing wrong with the low pricing, since low prices are beneficial for the customer and in fact, usually the aim and result of a free market and healthy competition. So at first glance, it may appear that the two objectives of competition law – consumer benefit and protecting competition are dichotomous. But, history and economic theory would tell us that predatory pricing could be used as an instrument of abuse. The predator offers its goods or services at unrealistically low prices in order to achieve a longer-term objective.
Determining when predatory occurred is complex and difficult as it is very difficult to determine whether drop in prices are due to predatory pricing rather than normal competition. “Predatory Pricing has not been mentioned specifically in the competition laws of most of the jurisdictions studied as amounting to “an abuse of dominance”. However, Sec. 4(2) (a) (ii) of the Competition Act, 2002 explicitly provides that predatory pricing as an abuse of dominant position. Sec. 2(o), Sec.33 (1) clause (j), (ja), (jb) of the MRTP Act, 1996 provided for predatory pricing as restrictive trade practice (RTP).
The Van Duzer Report, 1999 gives some basic indicators of predation which may be identified as follows, though none is conclusive.
1. Market power defined by reference to market shares and barriers to entry. In the absence of market power, the prospect of recouping the costs of a predatory campaign is small.
2. A policy of selling at prices below some measure of the predator’s cost.
(A) Where sales are at prices below average total cost and the predator has no pro-competitive explanation, such as:
(I) meeting competition or changes in demand conditions; or
(II) Excess supply.
(B) Where sales are at prices below average variable costs.
3. Evidence of predatory intent i.e., intention to reduce competition or eliminate competitor.
Short term promotional offers are cited by the dominant firm as defence. The Short-term promotional price reductions are given by a dominant enterprise when it launches a new product or enters a new market. The rationale underlying this is that customer familiarity with the product in question during the promotional pricing phase may render them loyal and therefore willing to pay a higher price in future because of the added qualities of the product. Several limitations apply to the defence of below-cost promotional pricing. These are:
1) The promotional price should be strictly temporary in scope and not amount to systematic below-cost selling.
2) It seems inherent in a promotional offer that it is limited in scope – repeat promotional offers may be tantamount to a predatory strategy.
3) The available evidence should be consistent with the promotional purpose of the price reduction.
It is submitted that a case-to-case analysis of whether it is genuinely a promotional offer must be conducted.
Indian position
In re Modern Food Industries (India) Ltd., the commission, while dismissing the complaint of the Director-General, observed that the essence of predatory pricing is below one’s cost with a view to eliminate a trade rival. Further, the Commission made it clear that the “mere offer of a price lower than the cost of production cannot automatically lead to an indictment of predatory pricing. By evidence, it has to be established that in fixing lower prices than the cost of production there is malafide intent on the part of charged party to drive its competitors out of business or to eliminate competition. The logic underlying the caution of the Commission is that price-cutting may be for genuine reasons, for example in the case of inventory surplus. Hence, the necessity of intent to be proved in a predatory pricing allegation becomes clear from this decision of the MRTP.[25]
The Commission in Union of India v. Hindustan Development Corporation and others held that, a mere offer of a lower price by itself does not manifest the requisite intent to gain monopoly and in the absence of a specific agreement by way of a concerted action suggesting conspiracy, the formation of a cartel among the producers who offered such lower price can not readily be inferred. Therefore, whether in a given case, there was formation of a cartel by some of the manufacturers which amounts to an unfair trade practice, depends upon the available evidence and the surrounding circumstances.
In re Johnson and Johnson Limited, it was held by the Commission that to sell a small portion of its products, in public interest, to the Government at prices lower than the prices normally charged to dealers, did not amount to predatory pricing, and particularly when the rates quoted were always above cost of sales.
Under the Indian Completion Act, 2002, Regulations on cost also need to be made by the Commission under the powers conferred under Section 64 (2) (a) of the Act. Since these regulations will be made on the cost of production of the enterprise, these will be imperative in determining how a cost-based test will be applied in India and according to the cost of production and we will see what relevant cost benchmark is taken into consideration while looking at below-cost pricing.
European position
In Radio Telefis Wireann (RTE) v European Commission {C 241 – 242/91P, (1995) IECR 743, (1995) 4 CMLR 718}, T.V Stations in U.K and Ireland Published weekly TV Guides covering their programmes exclusively and claimed copyright protection. Magill TV Guide wanted to publish a comprehensive guide of TV programmes but were prevented by TV stations on the ground of copyright infringement. European Court of Justice concluded that only those restrictions on competition inherent of IPR can be protected, but not abuse of dominant position, because of the public demand for a comprehensive TV guide, the TV stations’ refusal to provide information on the ground of copyright prevented the creation of a new product by Magill TV stations did not produce that product and their conduct was excluding competition in the market and thus constituted abuse of dominance.
In AKZO Chemie BV v Commission of the European Communities (1991), AKZO, a Dutch producer holding approximately 50% of the organic peroxide market in Europe, engaged in systematic conduct, inter alia below-cost pricing, selective price cuts and threats, aiming to prevent ECS, a small competitor originally operating in the English market of flour additives from expanding in the related plastics sub-market. AKZO first threatened ECS to drive them out of the flour additives market and eventually offered large discounts to ECS´ customers. ECS claimed an infringement of Article 82 EC that found that AKZO had abused its dominant position by offering below-cost prices.
It was observed by ECJ that “prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that of eliminating competitors so as to enable it subsequently to raise its prices by taking advantage of its monopolistic position, since each sale generates a loss, namely the total amount of the fixed costs (that is to say, those which remain constant regardless of the quantities produced) and, at least, part of the variable costs relating to the unit produced. Moreover, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them”.
In Tetra Pak International SA v Commission of the European Communities [1996] ECR I 5951, it was observed that in AKZO this Court did indeed sanction the existence of two different methods of analysis for determining whether an undertaking has practiced predatory pricing. First, prices below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. Secondly, prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown”. It was also observed that “Furthermore, it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated”.
U.S. position
In Brooke Group Ltd. v. Brown and Williamson Tobacco Corp 509 U.S. 209 (1993), it was observed that “Accordingly, whether the claim alleges predatory pricing under 2 of the Sherman Act or primary-line price discrimination under the Robinson-Patman Act, two prerequisites to recovery remain the same. First, a plaintiff seeking to establish competitive injury resulting from a rival’s low prices must prove that the prices complained of are below an appropriate measure of its rival’s costs. … The second prerequisite to holding a competitor liable under the antitrust laws for charging low prices is a demonstration that the competitor had a reasonable prospect, or, under 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices. “For the investment to be rational, the [predator] must have a reasonable expectation of recovering, in the form of later monopoly profits, more than the losses suffered.” Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced.
b) Unfair or discriminatory conditions or prices in purchase and sale [Sec. 4(2) (a)]
There shall be an abuse of dominant position if an enterprise directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service or price in purchase or sale (including predatory price) of goods or service. One of the most blatant forms of this abuse is manifested in discounts on the selling price. If discounts are given only to a select few customers to the peril of others within the customers’ relevant market, or to a customer who is willing to forgo its rights to purchase from another competitor, such discounts in tandem with its terms and conditions are said to be unfair and discriminatory. Moreover, if such discounts and conditions are imposed with the intention of eliminating competitors or distorting the competitive forces established within the relevant market it is abuse of dominant position.
The scope of concessions or benefits was succinctly discussed by the MRTP commission in the case of RRTA V Allied Distributors and Co. and Bengal Potteries Ltd. as early as 1974 which still holds good. While discussing the incentive discount, which is a common practice among the business houses to increase their sales, the commission observed that “incentive discount to increase the sale of any special item on production is not hit by section 33(1) (e). This is not concession or benefit given in connection with or by reason of dealings. It is connected with the quantum of sale and not with the fact of dealings itself. It is not that each and every practice of giving allowances, discounts, rebates or credits in the course of trade or business that is the subject matter of clause (e) of section 33(1) of MRTP Act, 1969 but it is only when by any of these forms or manners the concessions or benefits are sought to be allowed or granted in connection with or by reason of dealings that clause (e) is attracted. Echoing this line of thinking, the Commission has observed in D.G. (I&R) v. Rajashree Cement that “the words ‘dealings’ used in Clause (e) is used as a commercial term and in the anti-trust laws of various other countries, it has acquired a definite connotation. It would mean series of transactions of sale, purchase or distribution of goods or provision of services . The concessions or benefits contemplated by Clause (e) must, therefore, be by reason of, or because of, or in consideration of dealings.” There are two orders of this Commission which have laid down a comprehensive interpretation of the law enunciated in Section 33(1)(e) of the Act. In these two orders, the Commission has taken a note of the various orders of the Commission in the past and arrived at certain postulates. They are as follows:
1. Differential or discriminatory incentive bonus or discount based on quantity is a restrictive trade practice within the meaning of section 2(o) in as much as such discounts would reduce the opportunities of the smaller dealers in being able to compete with the bigger ones and this would have the effect of preventing, distorting or reducing competition between them.
2. Such a practice is a concession, benefit, allowance, discount or rebate in connection with or by reason of dealings within the meaning of Clause (e) of section 33(1) of the Act;
3. The manufacturers or producers may, however, be allowed to pass through the gateways under Clause (h) of Section 38(1) if they establish that the differential discount is negligible or so insignificant that it is not likely to affect the competition to any material degree.
Concessions of benefits granted by manufacturer or supplier in the form of annual turnover rebates, discriminatory discounts linked to quantum of off-take by the dealer, differential discount for different areas in a state are all forms of restrictive trade practices under Clause (e) of Section 33(1) of MRTP Act, 1969.
(c) Limiting Practices (Sec. 4(2) (b) of the Competition Act, 2002)
Dominant companies cannot limit production, markets or technical development to the detriment of consumers. If such a company restricts output it can charge higher prices or it can refuse to supply to potential competitors. A dominant company must not limit production or markets. It cannot refuse to supply to a customer just because it has set up competition. This can lead to fines up to 10% of turnover. Such a company should be able to support its refusal by an objectively justifiable reason. A business might have, for example become an unworthy credit risk.
European cases
EC law requires a dominant company to act fairly and to treat like cases alike. It will have to set up evidence that a given order is too small to be economic. In Hugin v. Commission [1979] ECR 1869 it was held to be abuse of dominant position where a supplier wanted to enter a downstream market himself and wanted to cease supplying to distributor. In that case, the grocery company, Liptons, had been the supplier in the UK of Hugin cash registers. Hugin decided to form its own UK subsidiary company and terminated the distribution agreement. Liptons continued servicing Hugin cash registers and supplying spare parts. Subsequently, Hugin refused to supply spare parts to Liptons. The objective reason given by Hugin was the technical nature of the products. The court did not accept this as justifiable reason. The Liptons were already doing the work. Abuse of dominant position was found. The market for Hugin cash registers specifically was found to be relevant market on which dominance was found and abuse established. Parts of cash registers of other makes were not interchangeable with parts of cash registers of Hugin make. Hence the relevant market got restricted. Dominance and abuse of dominance were found relatively easily. The U.K and E.C laws provides that the following points must be considered to determine whether the dominant company’s limiting or restricting of supplies is justifiable:
– is the supplier in a dominant position ?
– What is the position of the purchaser? Is it a competitor, potential competitor, new entrant to the market or old, established customer?
– What are the real reasons why the supplies will be stopped? Are they objectively justifiable?
– Are there ulterior grounds which the purchaser could allege are the real anti competitive reasons for supplies ceasing?
– Can the supplying company prove its reasons for ceasing supplies and show that other customers in the same position are treated in the same way?
c) Conditional Contracts or Exclusive dealing:
Dominant companies cannot make customers or suppliers accept supplementary conditions before agreeing to enter into a contract where such obligations have no connection with the contract.
For example, Firm A sells product y and Firm B, having a “dominant” position in product x, sells products x & y separately and as a bundle for a substantial discount such that the price of the bundle is only marginally greater than the price at which Firm A is selling product y. Firm A claims (likely under the abuse of dominance or tied selling provision) that Firm B is engaging in anti-competitive activity including predatory pricing with respect to product y (the product both Firm A and Firm B sell). A key issue in determining whether pricing of the competitive product (product y) is below cost is whether the discount given by Firm B on the entire bundle of products should be wholly allocated to product y. This is the case of both product tying and predatory pricing at the same time.
European cases
Article 82 EC Treaty is the relevant provision in the EC concerning predatory pricing. Article 82 (a) prohibits unfair pricing and trading conditions, while Article 82 (c) concerns price discrimination. The former provision is applicable to predatory pricing conduct involving unreasonable low prices, whereas the latter condemns selective price cuts in the respective markets.
In Re British Telecommunications, OJ 1982 L360/36, the corporation enjoyed dominant position because of its contemporary monopoly for providing telecommunications services in the UK. Abusing its dominant position it prohibited message-forwarding agencies from relaying telex messages originating outside the UK. Thus it made the telephone and telex installations subject to obligations which had no connection with assignment of telephone and telex services.
In Volvo v. Veng (1988) ECR 6211 concerned manufacture of automotive body panels. The competition Laws of most of the countries provides for exception to the owner of intellectual property rights to license those rights to enhance competition as that would amount to depriving the owner of the rights of the specific subject matter of the rights. Yet there is an abuse where refusal is accompanied by anti-competitive conduct as it happened in above case:
(a) where there is an arbitrary refusal to supply spare parts to independent repairers;
(b) where a manufacturer sets prices of spare parts at unfair level;
(c) where a manufacturer decides no longer to produce spare part of a particular model even though many cars of that model are still in circulation.
d) Practices resulting in denial of market access: [Sec. 4(2) (c)]
Barrier to entry of new enterprises into the relevant market is a major restraint on the working of competition. Barriers to entry can be of three types: artificial (introduced by government) regulation or trade regulation), natural (linked to the production technology, scale and scope economies) and strategic (set up by firms to deter entrants, through over investment of loyalty bonuses for example). When an enterprise with dominance in the relevant market controls an infrastructure or a facility that is necessary for accessing the market and which is neither easily reproducible at a reasonable cost in the short term nor interchangeable with other products/services, the enterprise may not without sound justification refuse to share it with its competitors at reasonable cost. This has come to be known as the essential facility doctrine (EFD). It has been recognized that any application of the essential facilities doctrine should satisfy the following:
– The facility must be controlled by a dominant firm in the relevant market
– Competing enterprises/persons should lack a realistic ability to reproduce the facility.
– Access to the facility is necessary in order to compete in the relevant market; and
– It must be feasible to provide access to the facility.
Subject to such conditions being satisfied, the Commission may under the provisions of Section 4 (2) (c) of the Act (related to denial of market access by a dominant enterprise) pass a remedial order under which the dominant enterprise must share an essential facility with its competitors in the downstream markets.
e) Re-sale Price maintenance:
Resale Price Maintenance (RPM) is a form of price fixing. RPM exists with a supplier specifying the minimum (or maximum) price at which the product must be re-sold to customers Price maintenance usually occurs where a firm tries to set a minimum price at which another firm can sell its product. It is one of the most pervasive restraints in the market place. RPM is a vertical kind of restriction where a wholesale supplier and a retailer which resells the supplier’s products fix a price at which the goods are to be sold. It is very complex to determine whether a particular arrangement between two parties leads to RPM. The Canadian Committee in its report popularly known as the Van Duzer Report of 1999 gave some economic indicia of anticompetitive price maintenance as follows:
1 The person implementing price maintenance (the “Supplier”) has market power, a characteristic of which is limited opportunities for customers to change suppliers;
2. The Supplier does not have an efficiency based justification, such as a desire to increase service or prevent brand impairing practices, which would include loss laddering or misleading advertising; and
3. The Supplier was induced to implement price maintenance in relation to one customer by another customer who competes with the first.
A large number of cases involving ‘fixed’ or ‘maximum’ price stipulations by manufacturers of goods, have come up for inquiry before the MRTP Commission, by and large on applications made by the RRTA (now Director General) or suo motu under section 10(a)(iii) or (iv) of the MRTP Act, 1969. In these cases manufacturers have been directed to make it unequivocally clear by use of suitable words that their wholesalers or retailers, as the case may be are free to charge prices lower than those indicated. There are many cases where the manufacturers have failed to mention that the dealers are allowed to sell at prices lower than specified in the price lists hence, leading to restrictive trade practices.
f) Tying arrangements:
Tied selling occurs when the supplier of a product, as a condition of supplying the product to a customer, requires the customer to either (i) acquire another product from the supplier or the supplier’s nominee; or (ii) refrain from using or distributing another product that is not of a brand or manufacture designated by the supplier. In addition to such contractual or coercive ties, any use of economic inducements to achieve the same result constitutes tied selling.
In, Unilever Bestfoods (Ireland) Ltd v Commission, Case C-552/03, (Unilever freezer case) Order of the ECJ dated 28 September 2006 the issue of product tying was under consideration. The fact of the case is that Unilever’s HB brand of ice cream enjoyed market dominance in Ireland during the late 1980s and in an attempt to defend its market share, the company began giving free ice cream cabinets to outlets on the condition that these outlets only allowed display space to the HB brand in the cabinet.
But in 1989 US company, Mars, attempted to place its new ice cream version of the already popular chocolate bar in Unilever chillers. Mars persuaded some retailers to include its product in Unilever freezers, but Unilever, in an attempt to defend its market share, continued to stop outlets to which it had given freezers from stocking competitors’ products.
The Irish courts in 1991 ruled that Mars was taking advantage of the freezer infrastructure that Unilever had developed in stores across the country. This led Mars to appeal to the EU commission in Brussels, and in 1995 regulators forced Unilever to let retailers buy the freezers in instalments thus end ending the exclusive provisions that Unilever insisted upon. And in 1998 the Commission outlawed Unilever’s exclusivity completely. The court held that, “The effect of the exclusivity clause is to cause retailers to act differently towards other brands and thus distorts competition on the market,” the judge said. Further the court held that “The provision by Unilever’s Van den Bergh Foods of freezer cabinets without charge to ice cream retailers on conditions that they use them exclusively for the stocking of its ice cream is contrary to community competition,” The Court of first instance (CFI) found that although these exclusivity clauses are a standard practice in the Irish impulse ice cream market, HB’s exclusivity clause restricted competition because of the popularity of HB’s ice creams and its strength on the market and because it caused retailers to act differently towards non-HB brands. The CFI found that the exclusivity was an abuse of dominant position because it prevented retailers from selling other brands and prevented competitors from gaining access to the market.
IV. Conclusion
In the Competition laws of all the jurisdictions studied, the size of a firm or its dominant position as such is not prohibited. However, Abuse of dominance /misuse of market power/ monopoly or the attempt to monopolize are considered bad under all competition laws despite the differences in concepts enumerated in the law and manner of determination. Under the laws of most jurisdictions, the first step in determining whether there is an abuse of dominance, misuse of market power or “monopoly or an attempt to monopolize” is defining the relevant market. The second step is determining whether the concerned undertaking/enterprise/firm is dominant or has monopoly power or a substantial degree of market power. Dominance or monopoly power or market power of undertakings is defined in most jurisdictions on the basis of the undertakings ability to operate independently of competition or to raise/control prices. Abuse of dominance/ misuse of market power/ monopoly have not been defined by most competition legislations. Most legislations such as those of the European Union, United Kingdom, Germany and India merely enumerate certain conducts which the dominant undertaking or undertaking having market power is not to engage in. The Competition legislations of the United States and Australia do not enumerate any specific prohibited conducts. The Australian law lists the purposes for which a corporation is not to take advantage of its market power. Therefore, above is the law of abuse of dominant position in various countries. In India we have yet to see how Competition Commission adjudicates matters relating to Sec. 4 of the Competition Act, 2002.
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[2] 382 U.S. 172 (1965), http://supreme.justia.com/us/382/172/ (Last visited on 07/11/2009) [3] 310 F3d 1360, http://openjurist.org/310/f3d/1360/golan-v-pingel-enterprise-inc-m (Last visited on 07/011/09) [4] 504 U.S. at 486, http://lw.bna.com/lw/19970916/9615293.htm (Last visited on 07/11/09) [5] For Full Text, see http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:61976J0085:EN:HTML (Last visited on 07/11/09) [6] Case 322/81 [1983]ECR 3461, P.861 [7]Mallika Ramchandran, “ Comparative Study : Law on Abuse of Dominant Position”,www.cci.gov.in/…/ComparativeStudyLaw_mallikaramachandran09022007_20080411100811.pdf (Last visited on 07/11/09) [8] Sec. 27(b) of the Competition Act, 2002 [9] Sec. 27(a) of the Competition Act, 2002 [10] Sec. 28 of the Competition Act, 2002
[11] Article.82 of the EC Treaty [12] http://europa.eu.int/comm/competition/antitrust/others/discpaper.pdf at p. 11(Last visited on 07/11/09) [13] http://www.oecd.org/dataoecd/3/24/2497266.pdf (Last visited on 07/11/09)
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[15] 504 U.S. at 486, http://lw.bna.com/lw/19970916/9615293.htm (Last visited on 07/11/09) [16] Supra, n.14 [17] 328 U. S. 781 (1946), http://supreme.justia.com/us/328/781/case.html (Last visited on 07/11/09) [18] http://supreme.justia.com/us/384/563/case.html (Last visited on 07/11/09) [19] http://caselaw.lp.findlaw.com/cgi-bin/getcase.pl?court=9th&navby=case&no=9556513 (Last visited on 08/11/09) [20] 310 F3d 1360, http://openjurist.org/310/f3d/1360/golan-v-pingel-enterprise-inc-m (Last visited on 07/011/09) [21] Supra, n.7 [22]Anti-competitive pricing practices and the Competition Act Theory, Law and practice, www.cb-bc.gc.ca/eic/site/cb-bc.nsf/eng/00760.html (Last visited on 08/11/09) [23] Ibid [24] RTP Enquiry No. 78/1992, decided on 7.2.1996; 1996 3 Comp LJ 154
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[44] Anti-competitive pricing practices and the Competition Act Theory, Law and practice, www.cb-bc.gc.ca/eic/site/cb-bc.nsf/eng/00760.html (Last visited on 08/11/09) [45] RRTA v. Bajaj Electricals. RTP Enquiry No 6/1975, Order Dated 4.8.1975 RRTA v. Hindustan Lever, RTP Enquiry No. 25/1974, Order Dated 27.3.1975. In re Bengal Process Engravers Association, RTP Enquiry No. 42/1989, Order Dated 13.10.1989 [46] Raymond Woolen Mills Ltd v. MRTP Commission and Anr. (1993) 2 SCC 550 [47] http://www.dairyreporter.com/Industry-markets/EU-court-freezes-Unilever-s-monopoly (Last visited on 08/11/09)
