Competition Policypart IIIRelevant aspects and importance

The abuse of dominant position Regulated by art. 82 of the European Union Treaty and by art. 6 of the Competition Law from Romania. Maybe the most doubtful anticompetitional practice from the viewpoint of the convergence of economic reality with the legislation.

The abuse of dominant positionArt. 6: It is forbidden the abusive use of a dominant position held by one or several economic agents through the use of the anti-competitive facts which have as object or may have as effect the negative influence on economic activities or the damage to the consumers. Text Law 21

According to the law, such abusive practices can consist in: Set discriminatory prices; Set contractual inequitable clauses; The refuse to deal with certain suppliers or beneficiaries; The limitation of production, distribution and technological development; The applying of unequal conditions to the equivalent performance; Conditioning of ending of some contracts of acceptance of some clauses stipulating supplementary performance which have nothing to do with the object of those contracts; The practice of excessive prices; The practice of predatory prices; The sale bellow the costs of production; The exploitation of the dependency state of a company.

To notice: Terms sometimes interpretable (imposing the prices, inequitable conditions, equivalent performances, excessive prices etc.), whose acceptation can be found in the European Jurisprudence but which leaves enough swap space; The same practice may be pro-competitional in certain conditions but can be qualified anticompetitional in others; Most of the times, the difference is made exclusively by the economic analysis wherethrough it can be proved the favorable impact over the market

To possess a dominant position, as a result of efficiency and innovation, is not anticompetitional therefore compatible with a market economy but, often, a dominant position is achieved through anticompetitional practices.The legislation does not sanction a dominant position per se but only the abuse of a dominant position

What does a dominant position mean?First index, extremely significant but not sufficient too:

The size of market quota => a dominant position is always accompanied by a high market quota, a market quota that is over 75% is specific to monopoly; a market quota that is over 50%, accompanied by competitors low quota is qualified as a dominant position; in certain conditions, ever market quota between 40-50% can grant a dominant position; market quotas under 25% are not taken into consideration in the analysis of the dominant positions except for the special cases.

What is the relevant market?

The definition in limitary sense of the relevant market can grant a market quota larger than the one anticipated through the taking into consideration of a relevant market in a larger sense. IMPORTANT!

Mature/Stagnant market (low increase); High barriers at the entrance and expand on the market;Increased profit margin;Augmenting prices / stagnation although costs are decreasing;Contestants with low market quota;Stable market quota;Buyers with reduced powers;The possession of some industrial ownerships critical for the market technology etc.Other indexes / relevant elements for the qualification of a market as being dominant:

the existence of a position of economic power;the prevention of an efficient competition (the exclusion effect);the independence of behavior regarding the other market participants (the competitors strategies dont have any impact on the companys behavior).The definition of dominance consists of 3 elements which are strongly connected:

Abuse of exploitation excessive or discriminating constraint pricesAbuse of dominant positionAbuse of exclusion refusal to make business, ruination prices, boycotts, discriminating prices, fidelity commissions, conditioned sale

X is an alternative provider of fixed telephone services which entered the national market for fixed telephone services a few years ago. Originally X, like other new entrants to this market, was able to win a substantial amount of customers for its services. Recently, however, X has seen a substantial number of its customers switch to the incumbent operator Y, which holds a dominant position on the national market for fixed telephone services. Based on rumours in the market and implicit indications from lost customers, X suspects that Y lures back customers by offering loyalty rebates and package deals for fixed telephone services and internet facilities on which market Y is also dominant. Abuse of dominant position. Example.

The classic theory of monopoly (the abuse of exploitation):A selling company in a monopoly position will reduce/ limit its production to determine the selling prices to surpass the level of the competitive prices.

This way it will obtain a supplementary economic rent to those it would obtain in the competitiveness conditions, named monopoly rent.

The modern theory of monopoly (the abuse of exclusion):

Horizontal blockageVertical blockageExclusion through prices loyalty rebate packages of products with different brands (bundling) ruination prices pressure on the commercial margins (margin squeeze)Exclusion which is not based on prices enforcing the brand exclusivity (single branding) liaison of products (tying) refusal of supplying

Rebates:1. Unconditional: Are granted to certain categories of customers (not to all of them) for all the acquisition which are made from the seller;can differentiate the final price between different categories of customers;

2. Conditional:Are granted to certain categories of customers as reward for a certain acquisitioning behavior, as a quantity acquired by these from the seller in a prior period; These rebates differentiate de selling prices to the customers depending on their behavior regarding supplies;

The anticompetitional effects of the system of rebates can appear especially in the case of conditional rebates, when the seller blocks his competitor access to the system of distributing

Single branding and loyalty rebateSingle branding obligations: Contractual obligations through which a buyer from a certain market focuses the largest part of its acquisition to a single supplier.English Clause a contractual clause through which the buyer compels itself to inform the seller of any other better offer and to refuse this kind of offer if the seller makes a similar counteroffer.

Tying and BundlingTying

The situation in which the seller of one product (anchor product) condition this selling by the acquisition from the buyer of another distinct product (tied product), either from the seller or from other economic agent designated by this. Only the tied product can be purchased separately on the market;

Bundling

the situation in which the seller offers a package of two or more products; pure bundling = component products are not available separate on the market; mixt bundling = the package as well as the component products can be purchased separately on the market, the condition to qualify the practice as bundling being that the package has to be at a discount as opposed to the sum of prices of the component products.Usually, this kind of practices are common on any type of market and are acceptable from the viewpoint of the legislation in the competition domain.

Therefore!

A company in a dominant position on the market of anchor product can use this position to determineexclusion effects mainly on the market of tied product

British Airways abuse of dominant position

British Airways (BA), the most important airway from Great Britain with a dominant position on the airway transportation market (39,7% compared to 5,5% that had Virgin, the next contestant);

Virgin Airways complains at the European Commission for the abuse of dominant position of BA.

Facts:

The abuse consists just in the method through which BA grants rebates to the travel agencies that commercialize air-travel tickets.

BA offered explicit or implicit to these customers supplementary commission if they managed to the air-ticket orders only or mostly at BA (loyalty commission);

BA offered different advantages on short route if the customers bought long-way air tickets (engl. tying conditioning the selling with the sell of another product)

European Commissions Decision:

sanctioned British Airway with 6,8 million Euro

British Airways obligation to stop this practice

Microsoft The abuse of dominant position through tyingVIP Case:

record fine for an individual company: 497 million Euro in 2004

on 10 November 2005 is added a fine of 280,5 million Euro as well as a fine of 2 million Euro / day for loose-fitting of the competition behavior (not stopping the anti-competition practice) according to the Commissions decision (first case in the history of EU)

starting with 31 July 2006 the daily fine rise at 3 million Euro / day

Microsoft CaseRelevant market the market of PC operational systems An operational system is a software product by means of whom software applications interact with hardware components of a PC; Network effects determine a strong tendency of dispersion of a sole operational system (O.S.) on the market;

Interoperability Problem

Who was the first idiot to buy a fax?

There are certain products whose exploitation value rise along with the existence of more users

Microsoft Abuse

After achieving the dominant position, Microsoft used this position on the O.S. market to: refuse the interoperability development with other O.S.; launch tied products (software applications), which redraw from the market competitive applications that enjoy strong positions (even dominant): Browser Internet: Internet Explorer vs Netscape; Media Player: Windows Media Player versus Real player.

Arguments against Microsoft: usage of dominant position on anchor market to eliminate competitors on the tied market (which eventual could have threat the position on the anchor market); selling Media Player in the O.S. (at 0 price) had as purpose reaching a dominant position on the tied market that would have aimed the exploitation of the market content (music, movies, multimedia) and of copyright. Microsofts reason for tying : more functionality for the final customers!

Commissions Decision: Microsoft obligation to offer to any competitor the needed info for its O.S. to be interoperable with Microsofts Obligation to sell O.S. that do not include Windows Media Player

............the Exceptions Confirm the RuleForbiddance principleMinimum standard behaviourExceptions by category systemIndividual exceptions systemThe secret of obtaining an individual exception lays in the art of proving!!!

Minimum standard behaviourThe 10% market share for agreements among competitors and15% for non-competitors agreements. The 5% market share for agreements having a cumulative anti-competitive effect.

Positive over negative effects prevalenceConsumer benefitsCompetition is not eliminated in an important market shareProduction or distribution improvementTechnical or economic progress promotionGoods and services quality improvementStrengthening of competitive SMEs position in domestic marketSignificantly lower prices for consumers

Economic concentrations forbidden

Economic concentrations which, having as effect the creation or consolidation of adominant position lead or might lead to the significant restriction dismissal distortion of competition on the Romanian market or a part of it!

is achieved through any legal act, regardless of its form and which either operates the transfer of property or use over all or a part of the goods, rights and liabilities of an economic agent, or whose object or effect is to allow to an economic agent or to an economic agents group to exercise, directly or indirectly, a determinative influence on some other economic agent or on several other economic agents

Economic concentration

An economic concentration operation takes place whentwo or more economic agents, previously independent, mergeone or more persons who already have control over at least one economic agent or one or more economic agents acquire, directly or indirectly, control over one or more other economic agents or over some parts of them, either by participating in the registered capital, or by purchase of assets, based on a contract or by other means

Minimis thresholdThe provisions of Law 21/1996 are not applicable to economic concentration operations if:

the cumulated turnover of the economic agents involved does not exceed the RON equivalent of EUR 10,000,000

and

there are not at least two economic agents involved in the operation recording, individually, on the Romanian territory, a turnover exceeding the RON equivalent of EUR 4,000,000It is forbidden to implement an economic concentration operation

until the Competition Council has issued

a decision on the notified concentration

EU competency In case of 2 MS , there are 3 conditions: The combined turnover of the companies should exceed 5 bil Euro;the total turnover at the community level of at least 2 companies that participate to the merger should be higher than 250 mil euro;each of the participating companies realise at least 1/3 of the total (at the level of the community) turnover in a different MS

And they are sanctioned with a fine of up to10% of the total turnover obtained during the financial year previous to the sanction:Putting into practice of an economic concentration operationBeginning of an economic concentration action declared to be incompatible with the provisions of the present law through a decision of the Competition Council

Based on the aforementioned facts, it was considered that CROSS LANDER violated the provisions ofart. 16 alin. (4) from Competition law no. 21/1996,by taking measures seen as irreversible by the law , putting into practice an economic concentration before the emitting of a decision by the Competition CouncilThe final amount of the fine was set to 3% of the turnover of the contravenient company in 2005CASE