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Competition 2 Notes

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EU Law: Competition 2 - abuse of a dominant position Article 102
? Art 201: seeks to deal with the threat to competition within the market posed by an undertaking which enjoys a dominant position in which it has the economic power to act independently of market forces.
? Art 102 does not prohibit market dominant in itself---rather, prohibits abuse of dominant positon that is capable of affecting trading between MSs.
? Can infringe both Articles 101 and 102: where an undertaking is not only abusing its dominance but is also a member of a cartel, the anti-competitive behaviour may infringe both Articles.
? Enforcement of EU competition law: o As noted previously, Commission oversees and enforces EU competition law; subject to JR by the General Court and ECJ. o And Reg 1/2003 has also empowered National Competition authorities and national courts to enforce EU competition law Art 102 TFEU, key elements.
? 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. o Such abuse may, in particular, consist in: o (a) Directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; o (b) Limiting production, markets or technical development to the prejudice of consumers; o (c) Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage. o (d) Making the conclusion or 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

1. One or more undertakings.

2. In a dominant position in the market (within the internal market or a substantial part of it---requires:
? (1) determination of the relevant market;
? and (2) whether dominant in that market

3. Abuse of that dominant position

4. This abuse May affect trade between MSs. Need 'one or more undertakings'--What is an 'undertaking'---same as last lec:

1 o Hofner & Elser: undertaking = encompasses every entity engaged in an economic activity o regardless of
? the legal status of the entity and
? the way in which it is financed o MOTOE---even when non-profit making. Dominant position, 2 steps
? Once you've identified undertaking, need to work out what is a dominant position in the market
? United Brands---need to determine the 'relevant market':
? Dominant position relates to:
? A position of economic strength.
? Which enables it (the undertaking) to prevent effective competition
? On the 'relevant market.'
? Steps to take: (1) identity the relevant market; (2) determine whether the undertaking has a dominant position in that market. Dominant position step 1: Analyse what is meant by 'relevant market'
?????What is the Relevant market?
?????Identifying the relevant market enables the Commission to determine which products are in competition in which geographical area within the relevant time frame. This then enables it to determine whether that undertaking has a dominant position.
?????Commission Notice on the Definition of the Relevant Market o Objective of defining the market = to identify actual competitors. To identify the competitive constraints that the undertakings involved face---and to identify the actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and preventing them from behaving independently of effective competitive pressure.
?????Relevant market: o Relevant Product Market (RPM) o Relevant Geographic Market (RGM) o Relevant Temporal Market (RTM) Relevant Product Market (RPM)
? RPM comprises: all produces or services which are in competition = interchangeable/substitutable.
? Extent to which products are interchangeable with one another; or substitutable with one another. Either = in competition with one another, and comprises the RPM. Determined by looking at demand and supply. 2


(1) Demand substitution = from consumer's perspective, what would consumer consider to be interchangeable/substitutable. (2) Supply substitution = from supplier's perspective. What can they switch production/supply of between. Either demand or supply substitution will do, don't need to supply both

Demand substitution
? Notice on the Relevant Market ----demand sub =
o products and/or services regarded as interchangeable/substitutable by the consumer o By reason of (what they will take into account, though not exhaustive list) o (a) Characteristics of product/service. o (b) Prices o (c) Intended use
? Basic form: which products would consumers purchase if the original product sought was not available? If consumers will readily switch ? part of same market. o Eg of application---United Brands, re banana market.
? More sophisticated test (SSNIP test): o Cross Elasticity of Demand: analyses effect of price increases. i.e. the degree to which demand for one product changes in response to change in price of another product. If demand for the first product increases in response to a price rise in the second product, then there is high crosselasticity of demand = they are in competition. o To do this analysis, Commission Notice sets out a test for demand substitution? Small but Significant Non-Transitory Increase in Price test ('SSNIP') (Originated in USA). o The test: looks at the effect of a Small but Significant (5-10%) Non-Transitory (i.e. permanent) Increase in the Price. If a sufficient enough number of consumers would switch to another product to make the price rise unprofitable, then the identified RPM to which the test was applied will have been too narrowly defined. The RPB should be widened to include more products, and the test applied again. o Process repeated until the price rise is found to remain profitable. o If you increase price of a product, you expect your profit to increase. Other customers switching to another product, then the product that they switch to is part of the same market.
? United Brands v Commission (1978): o Question: are bananas part of the overall fruit market; or are bananas a separate market of their own?
o Identification of RPM important because of the resulting market share (United Brands only had a small share of the overall fruit market as a whole, so would not have had 3


dominant position; but had a 40-45% share of the banana market). o There is a separate banana market, rather than being part of a wider fruit market. o Why---ECJ found peculiar/distinction features of bananas, which prevented them from being interchangeable with other fruit from consumer perspective:
? (a) they are available in sufficient quantities throughout the year, unlike other fruit;
? (b) they are also soft, seedless and easy to handle;
? (c) they thus satisfied the constant needs of the very young, very old and the sick.
? Such consumers would likely be enticed away by other fruits (especially in 1970s, not that many fruits on offer all year!) o Saying that bananas are unique in that sense---for those groups of people, there is no real substitute for bananas. o Remember this case is from the 1970s Hilti AG v Commission (1990), separate markets for nail guns; Hilt-compatible cartridges; and Hilti-compatible nails. : o Hilti produced nail guns. Company commissioned its own report showing that RPM for nail guns was not simply 'nail guns' in themselves, but rather the general market of industrial fasteners. In which case, Hilti's place in the RPB would have been relatively small, and it could not have offended Art 102 as would not have been dominant. o Commission, General Court and ECJ all rejected this: HELD: nail guns were sufficiently unique as a product to occupy a separate part of the industrial fasteners market. o Further, Hilti-compatible cartridges, and Hilticompatible nails, also had their own separate markets
---so actually identified 3 different RPMs---and Hilti had a dominant position in each of them. o Further: the cartridges used to fire it are also a separate market; as well as the nails they fired. o So 3 separate markets identified.

(2) Supply substitution
? Notice on the Relevant market: supply substitution = suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices.
? So need to assess how easy for rival manufacturers to switch production so as to produce competing goods, either now or in the future. If easy, then unlikely that the original manufacturer is dominant in the market.

4 ??

If a manufacturer is dominant in a market of high supply substitution, it is assumed it will not retain dominance for long---
because rivals can easily manufacture competing goods if the original manufacturer abuses its customers. Euroemballage Corn and Continental Can (1973)---found high supply substitutability, general light metal containers market o Continental Can had acquired a German company and transferred its shares in that company to a new subsidiary. Then used the subsidiary to acquire a second company. o Commission decided: the first acquisition and establishment of the subsidiary gave Continental Can a dominant position in 3 distinct markets: the markets in light containers for preserved meat; in light containers for preserved fish; and metal closures for glass containers. o It found that the second acquisition abused that position because it almost eliminated competition. o ECJ overrules Commission. Decides they are all part of one market, the general market for light metal containers-- because manufacturers of other forms of light metal containers (eg containers for fruit or condensed milk) can switch production between these cans and jar tops easily, at minimal costs, thus entering these sectors in sufficient strength to act as a counterweight. They are all actually part of same market. CF Michelin I---low supply substitutability, re replacement tyres for heavy vehicles and light vehicles o ECJ rejected Michelin's argument there was a single market for replacement tyres. o Commission identifies 2 separate markets: replacement tyres for light vehicles; and replacement tyres for heavy vehicles. o Firstly, there was no demand substitution (from consumer perspective)---the two types of tyre were used for different vehicles and so not interchangeable. o And, secondly, Supply perspective, there are not interchangeable---because the production plan of manufacturers would have to be modified to switch production from light to heavy vehicle replacement tyres, which takes time and considerable investment--: to switch production from light vehicle tyres to heavy vehicle tyres, you have to shut the factory down and re-equip the factory: so you can't do it in the short term without incurring significant costs. o So suppliers cannot switch production (a) in the short term and (b) without significant costs. o ECJ went on to hold---Michelin dominant, and abused that dominance---non-transparent criteria for financial rebates and bonuses: Michelin was dominant in this market; had abused that dominance by offering financial rebates and bonuses

5 ?calculated on basis of criteria which were not transparent and changed several times during each reference period. This uncertainty put dealers under considerable pressure to hit sales targets; and thereby had effect of preventing them from being able to choose more favourable options from other suppliers. Microsoft- low supply substitutability o Commission Identified 3 separate markets: o (1) Market in PC operating systems. o (2) Market in work server operating systems. o (3) Market in streaming media. o Why treated as separate markets? Because low supply substitutability between them: to produce any one of these types of software, takes considerable expense and substantial periods of time. And, if you manage to produce it successfully, there's a huge risk it won't take off. So no easy switch between these types of software from point of view of software companies---so separate markets. o PC Operating systems & Work Server Operating System, both separate markets because, time, expense, risk:---own market because development and testing of them involved a substantial amount of time and expense and entailed substantial commercial risk. o Streaming Media Players: a third separate market, because entry into the market required significant research and development investments, had to take account of the protection of existing media technology by IP rights; and needed significant amount of digital content to play back. o Commission went on to find: Microsoft had a dominant position in the PC Operating market, which it had abused by including its Windows Media Player with its own Windows operating system ('bundling', see below). This discouraged users buying other streaming media players, thus discouraging competition. o Also found Microsoft had a dominant position in Worker server Operating systems---which it abused by refusing to provide another software producer with information that would enable it to design work group server operating systems which could seamlessly integrate with Microsoft's Windows work group networks. o Commission imposed record fine of 497m EUR and additional penalties. o Upheld by Grand Chamber and General Court in Microsoft v Commission (2007) Remember: only to have demonstrate demand OR supply substitution in order to find that products fall within the same product market. If you find them to be part of the same market on either ground, that will do.


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