Introduction
Market competition in any industry is expected and healthy for the development of economic growth and consumer demand. While large industry players may use their position to gain advantage and increase market share, there are limitations in many jurisdictions as to the extent that such conduct can go.
Abuse of dominant position is the term used to describe unilateral actions of a party that takes advantage of its dominant market power or position to hinder market competition and welfare. This paper will examine the scenario presented with household plant producer and retailer Alfa being accused of abuse of dominance under Article 102 TFEU.
Article 102
Article 102 of the Treaty of the Functioning of the European Union (TFEU) is the primary stature currently used for legal enforcement of abuse of dominance in the market in the EU. It is designed for two major purposes of protecting consumers against exploitation and prevent anti-competitive behavior among firms. It states, “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.” The article then provides specific conduct of abuse, including:
- Directly and indirectly creating unfair prices or trading conditions;
- “Limiting production, markets or technical development to the prejudice of consumers”;
- Creating different conditions in equivalent transactions with other trading parties, placing them at a competitive disadvantage;
- Forcing clauses into contracts with other parties in commercial use that have no relation to the primary subject of the contract.
When applying Article 102 TFEU, it has to meet three constituent elements which are 1) proving the dominant position in the market, 2) proving prima facie that one-sided, restrictive abusive conduct occurred, 3) assessing ‘objecting justification’ for such actions, without which the conduct would be considered abusive.
The EU commission have moved from a traditional approach to inappropriate conduct to a more analytical perspective on economic effects, but formalistic assessment of unilateral conduct is still present. Behavior that impairs genuine, undistorted competition in the EU single market is disallowed. While Article 102 is not meant to protect inefficiencies of competitors, the dominant company has to establish a legitimate objective justification that protects or enhances public interest or generating efficiencies, but it must be appropriate and proportionate.
Establishing Dominance
In order to be in violation of Article 102, the EU Commission must establish that the undertaking is in a dominant market position, evaluated based on three variables of product market, geographical market, and temporal factor. A firm typically has market power in a supply of specific goods. The narrower the product market, the easier it is to conclude the dominance of the undertaking. The Commission approaches this element from the perspective of interchangeability, the extent to which a good is interchangeable with other products, and the extent of cross-elasticity from the demand side.
For example, in a case against Michelin, the EU commission determined that the company was in a dominant position in the market for new replacement tires for heavy vehicles, and it was different from Michelin’s involvement in tires for cars and vans since it was a structurally different category. The geographic market is the territory in which the traders operate in similar homogenous conditions of competition. The relevant geographic market is the entirety of EU. Meanwhile, the temporal factor is potential seasonality of products when competition is low.
The dominant position is also identified in the context of market power. The Commission has to decide whether a single firm undertaking has the market power that is dominant. The definition was set by the United Brands case, with the legal test being presented, “The dominant position referred to in this Article relates to a position of economic strength enjoyed by and 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.”
The Commission or courts will typically examine market share owned by the undertaking and other factors which can serve to reinforce its dominance. In the United Brands case, the dominance threshold was 45% market share, but some other cases have gone as low as 43%. Other factors to consider were vertical integration, economies of scale, and barriers to entry which are contributive of a company that has a dominant position in the market.
Prima facie Evidence of Misconduct
The European Commission will most likely target Alfa with violations of Article 102 with inappropriate conduct under clauses a-c: imposing unfair trading condition, limiting production which prejudices consumers, and discriminatory conditions for trading partners. The list of abusive behaviors listed in Article 102 is not exhaustive, and it is ultimately up to the Commission and courts to evaluate on a case-by-case basis on what unilateral acts are anti-competitive. Abuses can be exploitative, most often aimed towards consumers, and exclusionary which are most applicable in this case. Exclusionary abuses are practices that a dominant undertaking can utilize to obstruct, restrict, or weaken competition.
In its guidance on enforcement of Article 102, the Commission notes that does on seek to impair effective competition, but to address behavior that has an adverse effect on consumer welfare in the form of higher price levels, limited quality of goods and services. One of the primary concerns as part of exclusionary abuses is that a dominant firm can behave in a manner which forecloses competitors from entering or growing within a market.
In the case of Alfa, the concern is for vertical foreclosure where a dominant firm uses misconduct to exclude competitors in the downstream market. For example, the dominant firm is both a supplier/producer and retailer. In vertical foreclosure, the dominant firm favors its retail subsidiary while excluding competition through various means.
There are three primary types of abusive behavior: mergers, refusal to supply, and price manipulation. In the case of Alfa, evidence points to abuse of refusal to supply. The case Commercial Solvents v Commission defined that a firm in a dominant position has the obligation to supply other firms. Article 102 explicitly prohibits discrimination between customers by applying “dissimilar conditions to equivalent transactions with other trading parties” and limiting productive capacity.
This is also relevant when abuse of a dominant position in one market influences on a different market, even if the undertaking has no dominance in the latter. This was established in the case Aéroports de Paris v Commission where the airport authority-controlled access to supply of catering services, and despite not being directly involved in the market of food retail, it abused its dominant position through discriminatory pricing which influenced the secondary market.
Assessing Justification
Refusal of a firm to supply existing customers or providing supply on some sort of discriminatory terms can be seen as abusive unless there is an objective justification such as reduction of supplies in firms that would otherwise place them at a comparative disadvantage. A firm must use objective criterion, and subjective elements such as preference of loyal customers, even marginally, does not meet the test.
The Commission have applied concepts of objective justification and proportionality to allow for flexibility that would prevent draconian applications of Article 102. However, the justification must reflect certain assumptions in the importance of protecting competitors and consumers as well as the significance of single market integration.
Recommendations
One of the most common and classic defense pleas invoked against abuse of dominance claims is challenging the dominant position on the market. Examining the market, the EU commission will likely separate the two categories of plant production and sales to retailers, and the retail sales to consumers. In terms of retail sales, Alfa accounts for 30% of EU household plant sales which is below the threshold of market dominance. This most likely also alleviates any claims of abuse in terms of pricing, as the lowering of price is justified by efficiencies and could be/was matched by competitors.
However, in the product market of houseplant product, Alfa accounts for 48%, with its nearest competitor at 24%. The Commission will view this as a separate market category from its retail part of the business through garden centers because the structure of business and sales to other businesses (garden centers) is a separate enterprise similar to the Michelin case.
Household plants have little interchangeability since they differ from outside plants significantly and require special conditions and technologies. Furthermore, there is little elastic demand which is also exacerbated by the fact that Alfa is one of just two major suppliers in the EU able to fulfill major orders and is also vertically integrated between its supply chain and the retail chain. These factors strongly point to dominance in the market.
Nevertheless, finding of dominance does not imply reproach, but rather it is the burden of the Commission to prove that the undertaking’s conduct has impaired genuine and undistorted competition in the common market. The Commission requires for strong and compelling evidence prior to intervention which encompasses many factors such as position of the dominant undertaking, conditions of the market, position of competitors, position of suppliers, extent of abusive conduct, evidence of foreclosure and evidence of exclusionary strategy.
Conduct undertaken by Alfa represents deliberate and continuous efforts to limit supply to its competitors while prioritizing its own garden centers. It was not a matter of efficiencies but evident discriminatory supply practices, as was collaborated by evidence of orders from Delta and Echo not going through via traditional communication channels of email and telephone. The situation created unequal conditions in the market, where Alfa’s subsidiaries received orders and releases weeks prior to competitors, indicating elements of vertical foreclosure.
Although related to the price fixture accusation which should not be an issue, evidence of communication by Alfa’s executive with language that its efforts are targeted at “destroy[ing] Delta” are also signifying intent, as the practices undertaken are not market and competitively appropriate.
After establishing market dominance and evidence of abuse, it is important to examine justification. As mentioned, the justification for pricing is appropriate as it represents Alfa’s attempts to improve efficiencies and achieve greater market share in its retail sector, with the pricing being within matching range of its competitors.
However, in regard to the justification of staff responding more slowly to requests from Delta and Echo in the houseplant industry, it is not appropriate and violates Article 102 guidelines as well. First, it is discriminatory once again as Alfa cannot prioritize its own subsidiary garden centers over its competitors, even marginally (while here, the distinction is large).
Next, the justification that it is meant to reduce staff pressure is not objective, but highly subjective. There is no evidence suggesting that doing so would reduce mistakes when responding to orders, and if so, this should have been the case across all orders. The justification fails to meet hardly any objective standards and directly negatively impacts the quality of goods and services for Alfa’s competitors.
Conclusion
Abuse of dominance under Article 102 TFEU is an issue taken very seriously by the EU Commission and it seeks to investigate any potential violators of misconduct which impairs genuine competition. The Commission will consider multiple factors and the case-specific elements. However, it has been established that Alfa holds a dominant position in the product market of supplying household plants to retailers including its own garden center subsidiaries.
There is evidence that it has engaged in abusive behavior taking advantage of its position as the dominant supplier, actively limiting supply and using discriminatory sales practices in a manner that benefit its garden centers but hinder competitors. It is a behavior that is characterized by negative intent from Alfa’s executives as well as has been persisting for weeks without any relief. Finally, Alfa’s justification is highly subjective and evasive. Therefore, in this case, Alfa meets all three of the criteria which constitute the abuse of dominance under Article 102.
References
Primary Sources
International Agreements
Consolidated versions of the Treaty on European Union and the Treaty on the Functioning of the European Union (TFEU) [2016] OJ C 115/89, art 102.
EU Court Cases
Cases 6 and 7/73 Istituto Chemioterapico Italiano SpA and Commercial Solvents v Commission [1974] ECR 223.
Case 27/76 United Brands Company and United Brands Continentaal BV v Commission [1978] ECR 207.
Case 322/81 Nederlandsche Banden-Industrie Michelin NV v Commission [1983] ECR 3461.
Secondary Sources
Books
Richard Whish and David Bailey, Competition Law (9th edn, OUP 2018).
Paul Craig and Gráinne de Búrca, EU Law: Text, Cases, and Materials (5th edn, OUP 2011).
Websites
Deborah Healey, ‘Abuse of Dominant Position’ (Global Dictionary of Competition Law, Concurrences 2018). Web.
Lexis PSL, ‘Abusing a Dominant Position—Overview’ (LexisNexis 2018). Web.