#5311 - Article 102 - Competition Law

Article 102

Competition Law LLM

Introduction to Article 102 4

Scope 4

Abuse 4

By One or More Undertakings 4

Dominance 4

Enforcement 5

Theoretical Framework 5

Objectives 5

Welfare 5

Socio-Political Objectives 5

Single market integration 5

European Competition Policy – Key Issues 6

Market power thresholds 6

Foreclosure 6

Exploitation 6

Discrimination 6

Dominance 7

Market Definition 7

SSNIP test 7

Framework for Market Definition 8

Demand-side substitution 8

Supply-side substitution 8

Quantitative techniques 8

Qualitative techniques 8

Dominant Position 9

Market Share 9

Lower Shares 9

Barriers to entry 10

Countervailing buyer power 10

Super-dominance 10

Associated Markets 10

Territorial scope of dominance 10

Exclusionary Abuses 11

Classification 11

Hoffmann-La Roche Standard 11

Form or Effect? 12

Effects 12

Probability of Effect 12

Pre-Review 13

Review 13

Post-Review Case Law 13

Prohibited Conduct 14

The Candidates 14

The Consumer Welfare Test 14

The As-Efficient Competitor Test 14

Intent 14

The Sacrifice / No Economic Sense Test 15

The “as if” test 15

Defences 15

Article 102 Defences 15

Article 101 Defences 16

Critiques 16

Nazzini 16

Akman 16

Rousseva 16

Primary Market Foreclosure 17

Predatory Pricing 17

Areeda-Turner Test 17

AKZO Test 17

Meeting Competition Defence 18

Recoupment 18

Sacrifice Principle 18

Above Cost Cases 18

Margin Squeeze 18

Exclusive Purchasing Contracts 19

Single Branding / Non-Compete Obligations 19

Discounts and Rebates 20

Conclusion 21

Introduction to Article 102

Article 102 TFEU (Formerly Art 82 and Art 86) is all about unilateral conduct. It prohibits

(i) any abuse – we are looking at conduct, but this is a really ambiguous definition

(ii) by one or more undertakings

(iii) of a dominant position – we are looking at a subset of firms that have market power

(iv) within the common market or a substantial part of it

(v) insofar as the abuse may affect trade between Member States.

Article 102 includes examples of abuses, but this is not an exhaustive list, much like in Art 101. However, offences like tying and discrimination are clearly included, and the Commission and the CJEU often reasons by analogy from these examples.

There is no express provision for exemption but:

(a) the concept of abuse includes the possibility of objective justification (British Airways (ECJ), para 69).

(b) the notion of “Art 102(3)”, under which the criteria for objective justification replicate the provisions of Art 101(3), appears to have gained acceptance (Post Danmark, para 42).

The structure of Article 102 therefore differs significantly from that of Article 101. Whilst the latter makes explicit provision for exemption, through a 2-step process (implemented through important exemption regulations), Article 102 has no such provision for exemptions, and it is implied, not explicit. Whilst it is clear that prima facie abuses may be justified, the scope and application of that defence leaves much to be desired.

Abuses are classed as being either exclusionary or exploitative. Exclusionary abuses seek to drive competitors out of the market, and/or exclude them from entering the market, thus indirectly harming competitors through a lack of competition. Exploitative abuses directly harm consumers through a dominant firm’s exploitation of its market power e.g. direct pricing or through inefficiencies. It should be noted that in practice, the Commission’s enforcement action has focussed on exclusionary abuses to the virtual exclusion of exploitative abuses (like excessive pricing, or pure discrimination) outside the internal market area. If it does look at exploitative, it does so in the context of exclusionary abuses. Moreover, there are also internal market objectives to the Commission’s enforcement.

Article 102 is, therefore, essentially concerned with the control of unilateral behaviour by a single firm. Note, however, that Article 102 also reaches:

(i) agreements concluded by a dominant firm; and

(ii) abuses committed by firms that collectively hold a dominant position.

Therefore, there may be contractual co-ordination that can be challenged under Article 101 and Article 102.

(i) Article 102 only applies to undertakings that, singly or collectively, hold a dominant position.

(ii) Dominance essentially comprises the ability to act independently of competitors and customers. Its existence is established on the basis of market shares supplemented by other market factors. A firm may hold a very high market share, and yet not be dominant, because the market is contestable, or a firm may hold not a very high market share, but still be held to be dominant. A high market share is neither necessary, nor sufficient.

In principle, the full range of remedies is available against abusive conduct. Decisions may be adopted under either Article 7 (infringement) or Article 9 (commitments) of Regulation 1/2003. In practice, the majority (over 75%) of decisions since 2005 have been commitment decisions. Article 102 is also directly enforceable in the courts of the Member States. Note that national competition authorities are responsible for over 90% of decisions taken to enforce Article 102. The practical application of the treaty happens mostly at national level. At a national level, there is the possibility of exemplary damages, particularly in the UK.

There are a number of competing claims to the purpose of Article 102. It is important to note that each of these purposes apply in each case, and while they will often lead to the same conclusion, there may also be tensions between them. Overall, we can contrast the EU’s objectives with America’s. European policy, in contrast to America, has evinced

(i) greater scepticism about the robustness of markets; and

(ii) greater faith in the abilities of regulators to intervene to correct market failures.

In that framework, there is less concern about the risk of false positives and greater concern about the risk of false negatives.

There is a consensus that:

(a) competition law should seek to maximise welfare;

(b) monopoly typically has an adverse impact on welfare by reducing output (the “deadweight loss” of monopoly, so called because it refers to demand that is unsatisfied without any supply benefit);

(c) competition law should, therefore, control monopolistic abuse.

However, monopoly also results in a transfer of wealth from the consumer to the producer by raising the price that is paid for the monopolist’s output. There is disagreement as to the proper treatment of that transfer. Should the law care about the additional revenue through raising price? Some (Chicago theorists) argue that the law should be neutral to distributional issues. Thus, the producer surplus from monopoly is unobjectionable. However, conventional thinking (especially in Europe) regards the transfer of surplus from consumers to producers as a legitimate subject for intervention. We must also note that there is a risk to over-deterring monopoly – monopoly profits are arguably required as an incentive to innovate.

This has been a particularly strong and continuing theme in European thinking, under the cumulative influence of the desire to:

(a) eliminate private power centres (note the impact of the Ordo-Liberal or Freiburg School in post WWII Germany); and

(b) protect small and medium sized enterprises.

The role of competition policy as an engine for the creation of a unified market has been a particular feature of EC law. In the context of Article 102, this has manifested itself in a number of rulings (especially concerning public sector bodies) against practices that favour domestic firms.

At what level of market power should the law bite? The threshold in the EU is much lower than in the USA. We will look at this more in the context of dominance but note now the disparity between US intervention thresholds (typically at least 60%) and those in the EU (40% and possibly lower).

Economic modelling shows us that single firm behaviour may simultaneously enhance efficiency and strengthen dominance. How is that ambiguity to be dealt with? In particular, how do we deal with (the admittedly rare) cases in which an efficiency gain cannot be achieved without eliminating competition? Where there are irreconcilable conflicts, how do resolve the risk/reward balance in relation to common forms of conduct such as pricing below total costs, conditional rebates and tying?

To what extent does such conduct have beneficial or harmful effects? Two specific issues that arise in this context concern: firstly, the extent to which competition law is used to protect competitors rather than competition. However, the development of the “as efficient competitor” test points to the resolution of the issue. Secondly, the extent to which a dominant firm is entitled to defend its commercial interests.

To what extent should excessive pricing be controlled by competition law?

Discriminatory behaviour is troubling for competition policy in a number of ways. Firstly, discriminatory prices may be output-expanding relative to the monopoly price: should it nonetheless be prohibited? Secondly, discriminatory pricing behaviour may be the most efficient way in which to recover substantial fixed costs: should it nonetheless be prohibited? Finally, discrimination that adversely affects...