Lecture week 7 – Abuse of dominant position & merger control (art.

102 TFEU)

Abuse of dominance subtopics

1. The prohibition

Four elements:
It is prohibited for:
1. An undertaking or several undertakings
2. Who hold(s) a dominant position
3. To abuse this position
4. Which affects interstate trade

Why would we be against abusing dominance position?

Because competition is good & no competition is bad.
 Big companies have no real competitors
 Less incentive for efficient production
 Less incentive for innovation
 Strong incentive for high prices
 Lower consumer welfare (+ rigid market structure)

Bigger companies can lead to lower consumer welfare BUT…

Companies can grow big through competition, by being the best  this is good.
But big companies have special responsibility: no abuse of dominant position  abuse is
bad.
ONLY the abuse is prohibited, not having big dominance.
 a. Dominant position – relevant market

Dominance on a market. Which market? The relevant market  after market definition it is
possible to measure market share and market power.

How to define a relevant market?

See: Commission notice on relevant market  You first have to focus on the product in
question and then the area where that product is brought to the market.
Product/services market
+
Geographical market

Market definition – product market

 A relevant product market comprises all those products and/or services which are
regarded as interchangeable or substitutable by the consumer, by reason of the products’
characteristics, their prices and their intended use.
[See United Brands and Commission notice, pt. 7.]

Example: Pepsi Cola. If the price went up, would you switch to Coca Cola?

Demand side Supply side

- Look at product characteristics - Look at production characteristics
- Look at consumers preferences - Can producers switch when price goes up?
- Will consumers switch when price goes
up? (SSNIP-test)

If the consumers switches, the two products are competitors (substitutable) and part of the
same market.

Do these questions make sense for platforms, for example Google? Google search is a two-
sided market. Users and advertisers.

Note:
 Wide definition – usually smaller share
For example: Pepsi, Coca Cola, Fanta in one relevant market for fuzzy drinks, then the
market share for Coca Cola in that one big market is really low.
 Narrow definition – usually bigger share

Market definition – geographical market

 The relevant geographical market comprises the area in which the undertakings
concerned are involved in the supply and demand of products or services, in which the
conditions of competition are sufficiently homogenous.
(Conditions are pretty much the same)
[See United Brands and Commission notice, pt 8.]
For your health insurance you don’t take one in German, because they don’t speak Dutch.
But for example, Google search it doesn’t matter if it has a different geographical market.

Look at:
 Geographical pattern of purchases (where do you buy it)
 Trade flows & pattern of shipments
 Transportation costs in relation to product costs (for tiny things transportation costs
is cheaper than for bigger things)

Note: market definition can change over time!

Summary of the steps so far

 Why market definition: to measure market power

 How: define relevant market
 Steps:
o Product market
 Demand side
 Supply side
o Geographical market

b. Dominance position – position on the market

Definition (ECJ): a position of economic strength enjoyed by an undertaking which enables it

to prevent effective competition being maintained on the relevant market by giving it the
power to behave to an appreciable extent independently of its competitors, customers and
ultimately of its consumers.

We have established the relevant market…

Assessing dominance
 Who are active on the market?
 What are their positions?
 Is market access easy?
How:
 Look at market shares of undertaking
 Look at position of others
 Look at other factors of undertaking
 Look at dynamics
If you are around the 50%, you have to look at the position of others and other factors:
 Statutory monopoly
 Legal regulation
 Intellectual property rights
 Superior technology and efficiency
 Vertical integration
 Access to financial resources
 Advertising, reputation, product differentiation
- See Hoffmann La Roche, pt. 42 etc

Market access
 If market access easy: indication of non-dominance
 Barriers to entry?

Summary of steps

 Define relevant market: product & geographical

 Establish dominance
 How:
o Market share
o Compare with dominance table
o Market share of others
o Other factors
 Conclude on dominant position
 Then continue with abuse…

. Abuse

Objective concept (ECJ): influencing the structure of a market that is already weakened,
through methods other than normal competition with the effect of hindering the
maintenance of the degree of competition or growth of competition.

Hofmann La Roche, pt. 91.

Types of abuse:
Exclusionary Exploitative
- Excluding competition/competitors - Harming consumers
E.g. predatory pricing, fidelity rebates, E.g. excessive prices, stopping supply,
tying clauses. discrimination.

Exclusionary behavior: it pushes everyone out. Excluded everyone out.

Exploitative behavior: misusing my consumers. You have to buy from me.

Example United Brands

- Discrimination of its resellers

- High prices
- Stopping supply of long-time reseller
 Exploitative abuse. Why? Behavior results in exploitation of resellers, who cannot switch
to another supplier.

Example Hoffmann La Roche

- Requiring customers to buy exclusively

- Fidelity rebates (kortingen) & discounts
 Exclusionary abuse. Why? Limits for customers choice to purchase from other sources
AND other suppliers are excluded from the market (entry barriers).

Rebates’ effect

Customers behavior  is the scheme ‘loyalty-inducing’?

Competitive process  impact on rivals’ ability and incentive to compete? If you have a
dominance position, if you don’t have a dominant position the consumer always has a
choice.
Consumer welfare  does the exclusion of rivals’ harm consumers?

Example Akzo

- Predatory pricing: selling below average variable costs.

 Exclusionary abuse. Why? It pushes (smaller) competitor(s) out of the market.

Example Bronner

- Refusing access to a network

- Network is necessary for new entrant (competitor) to reach customer
 Exclusionary abuse? Why? If network is ‘essential facility’ (cannot easily be replicated)
competitor cannot reach customer -> no competition on downstream market.
Example Google Shopping

- Search engine
- Display of results is tweaked: diverting traffic to own products through google comparison
shopping
 Exclusionary abuse. Why? Leads to barriers for other products, which is bad for
consumers AND stifles innovation.

Summary of steps

 Define relevant market: product & geographical

 Establish dominance: market share + other factors
 Establish abuse: exploitative or exclusionary
 On exam:
o Compare with cases you know about
o Reason why there is abuse
 Conclude on dominant position and abuse

Summary of ALL STEPS art. 102 TFEU

Merger control regime

Types of mergers
If merger control aim is to prevent elimination of competition trough M&A’s
Then:
 Horizontal mergers are to be looked at critically
 But: are vertical & conglomerate mergers also bad for competition?
 EU policy choice: all types of mergers scrutinized, because sometimes vertical &
conglomerate mergers can also have negative effects.

Three steps
1. Is there a concentration?
2. Does it have a community dimension?
3. Is it allowed?

Primary source  Merger regulation and case law

Secondary source  Many regulations and policy documents

1. Is there a concentration?

Art. 3(1) Merger Regulation: three possibilities

- Complete merger (new entity)
- Take over  between undertakings
- Some types of joint venture (daughter company)

2. Does it have a community dimension?

Art. 1(2) & 1(3) Merger Regulation: two step test.

Turnover (omzet)-thresholds:
1st threshold: community dimension, unless…
2nd threshold: even if 1st threshold not met, still possible to have a community dimension,
unless…

 Yes: notification to the Commission and continue with step 3

 No: possible notification to national authority
3. Is the concentration allowed?

Art. 2(3) Merger Regulation: substantive test.

“significantly impede effective competition (…), in particular as a result of the creation or
strengthening of a dominant position….” (SIEC test)

How do you assess the SIEC test?  SIEC on a market. The relevant market.

After market definition: what is the effect on the relevant market of the proposed merger?
What does the SIEC test cover?
Generally: creating dominant firm.
Sometimes also ‘coordinated effects’

What is the effect on the relevant market of the proposed merger?

Questions to ask:
 What is/are relevant market(s)
 What are market shares after merger?
 What is the expected effect on competition parameters?

How to apply the SIEC test?

 Horizontal, vertical of conglomerate merger?
(Horizontal is much worse)
 What is (relative) market position of the parties?
o Market share on relevant market, before & after
o Market share of others on the relevant market
 Creating a dominance position?
o If yes: probably problematic, what are expected effects (non-coordinated
effects), check defenses
 Collective dominance on oligopolistic market?
o If yes: may be coordinated effects, check defenses
Efficiencies: arguments that encounter the consumer welfare loss so that there is no
significant impediment to comp.

Types of efficiencies
 Supply-side efficiencies
o Cost reductions
o Product repositioning
 Demand-side efficiencies
o Network effects
o Pricing effects
o Efficiencies in vertical mergers
 Dynamic efficiencies
o Combining complementary distribution of marketing assets
o Economies of scale and score in R&D
o Upgrading management

Failing firm defense: without the merger the target firm would leave the market, so that the
counterfactual is worse for competition.

Remedies to ‘get rid of’ the negative effects

- Divestiture of parts (structural remedy)
- Access to technology or markets etc (behavioral remedy)

OVERVIEW