Abuse of a dominant position in European law: Article 102 TFEU (ex Article 82 TEC)

Article 102 TFEU (ex Article 82 TEC)

The relevant rule for the definition of abusive behavior in European Union law is Art. 102 TFEU, formerly Art. 82 TEC. It reads as follows:

“Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal 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 un-fair 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 other parties of supplementary obligations which, by their nature or according to com-mercial usage, have no connection with the subject of such contracts.”

The wording of Art. 102 TFEU names two requirements for market behavior to qualify as abusive: A dominant position of the market participant and abusive behavior; the list of abusive practices in the article is not exhaustive, however, and just supposed to give rule examples.²⁹³ The two elements shall be examined subsequently.

a) The dominant position

The European Court of Justice, since its famous decision in Hoffmann-La Roche (1979), defines market dominance as follows:²⁹⁴

“The dominant position … relates to 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, its customers and ulti-mately of the consumers. Such a position does not preclude some competition, which it does where there is a monopoly or quasi-monopoly, but enables the

293 Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 34. 294 Hoffmann-La Roche v Commission. Case 85/76. European Court reports 1979, 461 (1979), Ref. 38-39.

Similar Richard Whish and David Bailey, Competition Law, 7th ed. (Oxford: Oxford Univ. Press, 2012), 179.

undertaking, which profits by it, if not to determine, at least to have an appre-ciable influence on the conditions under which that competition will develop, and in any case to act largely in disregard of it so long as such conduct does not operate to its detriment.”

In economic terms, this definition implies an appreciable influence on the market price, exerted by the dominant firm.²⁹⁵ The identification of a dominant position requires the definition of the relevant market with regard to the product traded, place, and (where applicable) time as a first step. In its 1997 notice²⁹⁶, the European Commission established the relevant market concept, specifying the

▪ relevant product market as comprising “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”; and the

▪ relevant geographical market as comprising “the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogenous”.

In practice, the European Commission employs the so-called SSNIP test to identify the relevant market and detect market dominance.²⁹⁷ The long form of the abbreviation –

“Small but Significant and Non-transitory Increase in Price”²⁹⁸ – clearly reveals the con-ceptual approach: Substitute products are identified in “a speculative experiment, postu-lating a hypothetical small, lasting change in relative prices and evaluating the likely re-actions of customers to that increase.” By including additional products and areas to the market at issue, it can be concluded “whether competition from these other products and areas affect or restrain sufficiently the pricing of the parties´ products in the short term.”²⁹⁹ In economic terms, price elasticity of demand is assessed, depending on con-sumers´ ability to buy from an alternative supplier.³⁰⁰

295 For its pricing decision, a company having a dominant position will only take into account the best re-sponses of its competitors to each quantity or price offered in the market and not solely its marginal cost of production. See Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 35 and Ref. 88.

296 European Commission, Notice on the definition of relevant market for the purposes of Community competi-tion law. Official Journal from December 9, 1997. N°. C 372.

297 Ibid, no. 15-19.

298 Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 102. The small but significant price increase ranges between 5 to 10 percent relative to competitive prices.

299 European Commission, Notice on the definition of relevant market for the purposes of Community competi-tion law. Official Journal from December 9, 1997. N°. C 372/7 no. 15.

300 With regard to the meaning and implications of the concept of price elasticity of demand, please refer to section D.I.1.a of this work.

However, the SSNIP test has some weaknesses, especially in cases where firms have al-ready charged prices above the competitive level. A further increase of the market price might not be profitable for the firm, resulting in a wide market definition and only small market shares of a powerful firm on the basis of the SNIPP test.³⁰¹ The European Com-mission tries to answer the question of market dominance therefore using additional cri-teria, e.g. analyses of the recent past, specific econometric and statistic studies, market views of customers and competitors³⁰², consumer preferences, barriers and costs associ-ated with switching of demand, and customer and price discrimination.³⁰³

Once the relevant market has been defined both product-wise and geographically, the firm being suspect of abusive practices has to be identified as dominant in the market. With regard to market dominance, European law refers to a paramount position in the Common European Market.³⁰⁴ In the past cases, jurisprudence has established a market share of about 40 to 50 percent as a relevant threshold for dominance.³⁰⁵ In praxis, however, eco-nomic analysis is used to judge the market power of firms. Factors like barriers to entry, and vertical integration of firms may intensify the presumption of dominance, whereas e.g. a dominant position on the supply side tends to weaken market power.³⁰⁶

b) Abuse of a dominant position

If the analysis comes to the conclusion that market dominance has to be approved, abuse of the dominant position has to be proved. The pure creation of a dominant position through internal growth of firms is not punished in European competition law.³⁰⁷ Therefore, the subsumption of market behavior under Art. 102 TFEU requires a clear definition of

301 This situation is denoted as “Cellophane Fallacy”. See Ernst-Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht, 2nd ed. (München: C.H. Beck, 2004), 395. Also Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 105.

302 Volker Emmerich, Kartellrecht, 11th ed. (München: C.H. Beck, 2008), 69.

303 European Commission, Notice on the definition of relevant market for the purposes of Community competi-tion law. Official Journal from December 9, 1997. N°. C 372/10-11, no. 36-43.

304 Georg-Klaus de Bronett, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H.

Beck, 2008), 903-904 Ref. 14, 15. Firms with dominance only on minor parts of the Common Market are not subject to the European abuse provisions.

305 United Brands Company and United Brands Continentaal BV v. Commission. Case 27/76. European Court reports 1978, 207 (1978), Ref. 108. Hilti AG v. Commission. Case T-30/89. European Court Reports 1994, I-00667, Ref. 92f. Akzo Chemie BV v. Commission. Case C-62/86. European Court Reports 1991, I-03359, Ref.

60. See also Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 35. Further Georg-Klaus de Bronett, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 907 Ref. 19.

306 Please refer to section D.I.3.b for an overview of structural factors that benefit concentration. See also Ernst-Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht, 2nd ed. (München: C.H.

Beck, 2004), 404-405.

307 Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 35.

abuse. Again, the 1979 case Hoffmann-La Roche (1979), delivers important indications for abusive behavior:³⁰⁸

“which, through recourse to methods different from those which condition nor-mal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the de-gree of competition still existing in the market or the growth of that competi-tion.”

Art. 102 TFEU names a number of examples for abusive practices, that are, however, not exhaustive. For the case of price manipulations discussed here, Art. 102 lit. a TFEU is the relevant paragraph. This rule has two prerequisites: Prices must be extorted and inap-propriate. For the element of extortion to be satisfied, any use of the market power a firm has is sufficient, a special exercise of pressure on the consumers is not required.³⁰⁹ The decisive element of the abuse provision, therefore, is the inappropriateness of the price charged.³¹⁰ The main criterion for the judgment of prices as inappropriate is a missing relation between price and economic value of the good or service.³¹¹ Based on the profit margin, thus the difference between production cost and price, the Commission eval-uates prices with regard to their appropriateness.³¹²

Several different concepts have been applied to determine inappropriate prices.³¹³ Com-parisons may be drawn with other (competitive) markets or prices for comparable goods and services.³¹⁴ However, it remains difficult to prove abuse of market power through excessive prices convincingly based on these approaches.³¹⁵ This core thesis of the present work will be developed in depth in the following chapter 2, analyzing the past efforts of competition authorities in detail.

308 Hoffmann-La Roche v. Commission. Case 85/76. European Court reports 1979, 461 (1979), Ref. 38-39.

309 Volker Emmerich, Kartellrecht, 11th ed. (München: C.H. Beck, 2008), 149.

310 Ibid.

311 General Motors Continental NV v. Commission. Case 26/75. European Court Reports 1975, 1367. See also Georg-Klaus de Bronett, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 919 Ref. 38.

312 Ernst-Joachim Mestmäcker and Heike Schweitzer, Europäisches Wettbewerbsrecht, 2nd ed. (München: C.H.

Beck, 2004), 410.

313 For an overview of the most famous approaches, please refer to Georg-Klaus de Bronett, Handbuch des Kartellrechts, 2nd ed., ed. Gerhard Wiedemann (München: C.H. Beck, 2008), 928-933.

314 Volker Emmerich, Kartellrecht, 11th ed. (München: C.H. Beck, 2008), 150.

315 Massimo Motta, Competition Policy. Theory and Practice (New York: Cambridge University Press, 2004), 69-70.

c) Sanctions

Upon existence of abusive practices, Art. 7(1) of the European regulation N° 1/2003³¹⁶ authorizes the European Commission to take all relevant actions necessary to end the abuse.³¹⁷ Furthermore, fines can be determined, Art. 23 REG 1/2003.³¹⁸ Abu-sive agreements between companies may be void by law if the violation is centered in a disturbance of the economic liberty of action, Sec. 134 BGB.³¹⁹ In less severe cases, an adaption of the contract provisions (e.g. a reduction of the price) takes precedence over the legal consequence of nullity.³²⁰ Beyond that, damages claims of aggrieved parties on the basis of Sec. 33 GWB are a legal tool to punish infringements of competition law.³²¹ The current system of sanctions for antitrust infringements will be presented in chapters 3 (governmental sanctions) and 4 (private sanctions) in a comprehensive manner and be subjected to an economic evaluation as part of the positive analysis of incentives for mar-ket participants.