: June 22, 2011 |
: Company Law
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Abuse Of Dominant Position
Dominant position as being created when one or more undertakings in a particular market use their position in that market to determine economic parameters such as price, supply, the amount of production and distribution, by acting independently of their competitors and customers. A firm is in a dominant position if it has the ability to behave independently of its competitors, customers, suppliers and, ultimately, the final consumer. A dominant firm holding such market power would have the ability to set prices above the competitive level to sell products of an inferior quality or to reduce ts rate of innovation below the level that would exist in a competitive market. Under EU competition law, it is not illegal to hold a dominant position, since a dominant position can be obtained by legitimate means of competition, for example by inventing and selling a better product.
• Rationale For Prohibition Of Abuse Of Dominant Position
The competition laws of the countries focuses on all activities be it multilateral activity or unilateral activity i.e. abuse of dominant position in the market. The extent of dominance can be defined as the position of strength enjoyed by an undertaking that enables it to operate independently of the competitive pressure in the relevant market and also affects the relevant market, competitors and consumers by its action. The impact on the market including barriers to new entrants is to be taken into account.
Dominance relates to a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition being maintained on relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers. Dominance means acquisition of significant market power, which enables the enterprise to increase the price or limit production independently of competitors as well as customers. Dominant position has to be determined in the relevant market and the factors for such determination are provided in the Act. Dominance is not treated bad per se; it is the abuse of dominant position which is prohibited.The anti –competitive business practices in which a dominant firm may engage in order to maintain or increase its position on the market. Competition law prohibits such behaviour, as it damages true competitions between firms, exploits consumers and makes it unnecessary for the dominant undertaking to compete with the other firms on the merits.
• Assessing Relevant Market
The market share that a particular undertaking has in a relevant market is one of the most important factor to be taken into account to determine whether it is in a dominant position. In Hoffman La Roche & Co.AG vs. Commission of the European Communities, it was observed that existence of dominant position may derive from several factors, which taken separately, are not necessarily determinative but among these factors a highly important one is the existence of very large market shares and that substantial market share as evidence of the existence of the dominant position is not a constant factor and its importance varies from market to market according to the structures of these markets, especially as far as production, supply and demand are concerned. In United States vs Microsoft it was observed that together the proof of dominant market share and the existence of substantial barriers to effective entry create the presumption that Microsoft enjoys market power.
There are primarily three stages in determining whether an enterprise has abused its dominant position, they are-
1. Relevant Market
2. Degree of Market Power/Monopoly Power in that relevant market
3. Determining whether the undertaking in a dominant position has engaged in conducts specifically prohibited by the statute or applicable law
Relevant Market- Before assessing whether an undertaking is dominant, it is important, as in the case of horizontal agreements, to determine what the relevant market is. There are two dimensions to this – the product market and the geographical market. On the demand side, the relevant product market includes all such substitutes that the consumer would switch to, if the price of the product relevant to the investigation were to increase. From the supply side, this would include all producers who could, with their existing facilities, switch to the production of such substitute goods. The geographical boundaries of the relevant market can be similarly defined. Geographic dimension involves identification of the geographical area within which competition takes place. Relevant geographic markets could be local, national, international or occasionally even global, depending upon the facts in each case. Some factors relevant to geographic dimension are consumption and shipment patterns, transportation costs, perishability and existence of barriers to the shipment of products between adjoining geographic areas. For example, in view of the high transportation costs in cement, the relevant geographical market may be the region close to the manufacturing facility.
According to Black Laws dictionary the product market is that part of relevant market that applies to a firm’s particular product by identifying all reasonable substitutes for the product and by determining whether these substitutes limit the firms ability to affect prices. The relevant geographical market is a market comprising that area in which conditions for the supply of goods and services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouhood areas.
The Indian Competition Act, 2002, expressly provides in Section 19(5) that Competition Commission shall have due regard to the relevant product market and geographical market in determining whether a market constitutes a relevant market for the purposes of the Act. The definition of relevant product market provided by Section 2(r) of the act states "relevant market" means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets. Section 2(t) defines the relevant product market as a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use. Section 2(s) defines relevant geographical market as a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring area.
The Act posits the factors that would have to be considered by the adjudicating Authority in determining the “Relevant Product Market” and the “Relevant Geographic Market”, reproduced herein below:
Relevant Product Market
The first stage in determining whether an undertaking is dominant is to determine the relevant product market, based on the interchangeability and substitutability of products. Where products are regarded as interchangeable or substitutable from a consumer's standpoint, they are considered to belong to the same product market. Interchangeability is measured on the basis of the intended use of the products, the price of the products and their physical characteristics. Once the relevant product market is defined, the relevant geographical market can be analysed.
· physical characteristics or end-use of goods;
· price of goods or service;
· consumer preferences;
· exclusion of in-house production;
· existence of specialised producers;
· classification of industrial products.
Relevant Geographic Market
It is also necessary to define the relevant geographical market when determining a dominant position of an undertaking. The relevant geographic market is the area in which the undertakings concerned are involved in the supply of relevant products or services, in which the conditions of competition are sufficiently homogenous, and that can be distinguished from neighbouring geographic areas because conditions of competition are appreciably different in those areas.
· regulatory trade barriers;
· local specification requirements;
· national procurement policies;
· adequate distribution facilities;
· transport costs;
· consumer preferences;
· need for secure or regular supplies or rapid after-sales services.
The determination of ‘relevant market’ by the adjudicating Authority has to be done, having due regard to the ‘relevant product market’ and the ‘relevant geographic market’ According to World BankOWCD Glossary, “If a market is defined too narrowly in either product of geographic terms, meaningful competition may be excluded from the analysis. On the other hand, if the product and geographic market are too broadly defined the degree of competition may be overstated. Too broad or too narrow market definitions led to understanding or overstating market share and concentration measure.
• Dominant Position
Once the relevant product and geographic market is defined, one can analyse whether the allegation of dominance of an undertaking in the relevant product market is verified. In N.V. Netherlands Banden Industrie Michelin vs Commission of the European Communities it is observed that dominant position under Article 86 of the EC Treaty it as “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 ultimately of the consumers.”
Dominant Position has been appropriately defined in the Act in terms of the position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market, in its favour.
The dominant position test can be conducted by using different criteria. The main criterion is the market share. Market share cannot by itself give a definite indication of dominance but can give a presumption of dominance. A company may have a large market share for a limited time without being dominant. The market share must be considered together with the length of time for which the company held the critical market share.
Even when the market share gives a presumption of dominance, other factors that could constitute barriers to entry in the market must also be considered. Barriers to entry into the market can be statutory regulations and national legal systems, the requirement of superior technology to be able to compete in a market, the vertical integration and well-developed distribution systems of the firms already present in the market, the product differentiation with brand names attracting the customer, and the conduct of the company in the relevant market.
The listing above is not exhaustive and it is widely recognised that there can be diverse indications of dominance. One final element that should nevertheless be mentioned is the internal correspondence of the company that is alleged to be dominant. Indeed, if the internal correspondence of the company confirms the allegation of dominance then this may be material evidence for the alleged dominance.
• “Abuse” Of “Dominant Position”
“The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where , as a result of the very presence of the undertaking in question , the degree of competition is weakened and which , through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators , has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition”
The philosophy of the Competition Act is that a situation of monopoly per se is not against public policy but, rather, the use of the monopoly status such that it operates to the detriment of potential and actual competitors. At this point it is worth mentioning that the Competition Act does not prohibit or restrict enterprises from coming into dominance. There is no control whatsoever to prevent enterprises from coming into or acquiring position of dominance. All that the Act prohibits is the abuse of that dominant position. The Act therefore targets the abuse of dominance and not dominance per se. This is indeed a welcome step, a step towards a truly global and liberal economy.
Here we are focusing on abuse of dominant position of enterprises. Most competition laws across the globe primarily deal with three areas namely, anti competitive agreements, the abuse of dominant position and mergers/combinations. Ordinarily, merely the fact that a firm or enterprise is in a dominant position is not prohibited by competition laws. For instance in EU laws in N.V. Netherlands Banden Industrie Michelin vs Commission of the European Communities it is observed that a finding that an undertaking has a dominant position is not a recrimination but simply means that irrespective of the reasons for which it has such a dominant position, the undertaking concerned has a special responsibility not to allow its conduct to impair genuine undistorted competition in the common market. In United States vs. International Harvester Co. the court citing the case of United States vs. United States steel Corp observed that law does not make mere size of corporation, however impressive, or the existence of unexterted power on its part, an offence when accompanied by unlawful conduct in the exercise of its power. The laws of most jurisdictions prohibit the abuse of dominant position/misuse of market power by enterprises.
Most of the competition laws does not define abuse of dominant position .Same is the case with India as well. According to Section 4(2) of the Indian competition Act, ‘There shall be an abuse of dominant position under sub-section
(1) If an enterprise, - (a) directly or indirectly, imposes unfair or discriminatory- (i) condition in purchase or sale of goods or service; or
(ii) Price in purchase or sale (including predatory price) of goods or service.
For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub-clause (ii) Shall not include such discriminatory condition or price which may be adopted to meet the competition; or
(b) Limits or restricts- (i) production of goods or provision of services or market therefore; or (ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
(c) Indulges in practice or practices resulting in denial of market access; or
(d) Makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
(e) Uses its dominant position in one relevant market to enter into, or protect, other relevant market.”
Under Indian competition imposing unfair and discriminatory prices has been specified as amounting to abuse of dominance if engaged by dominant enterprises.
In US, the offence of abuse of dominant position is included within the phrase ‘monopolization or attempt to monopolize’ as mentioned in Section 2 of the Sherman Act. Monopolization has two elements:
1. The possession of monopoly power, and
2. The wilful acquisition or maintenance if that power as distinguished from the growth or development as a consequence of a superior product,business acumen or historic accident.
Earlier the courts were of the view that the wilful element required under the Act could be satisfied by little more than proof that monopolist knew its behaviour would solidify its monopoly position.However more recent decisions have abandoned the view that any conduct that confers monopoly power on a firm or that enhances a monopolist’s market position necessarily satisfies the second element of the offence of the monopolization.The intent of the person is relevant to the analysis as to whether the conduct is exclusionary or predatory and it also has been noticed that the conduct would be exclusionary or predatory on the examination of the action of the undertaking concerned in the light of the consumers interest i.e. as to whether it has impaired competition in an unnecessary restrictive way.The test that has been laid down is that if a firm attempts to exclude rivals on some basis other than efficiency, the behaviour can be termed as predatory. On the other hand, an action of attempted monopolization would require
1. That the defendant has engaged in predatory or anti-competitive conduct with
2. A specific intent to monopolise and
3. A dangerous probability of achieving monopoly power.
Under Specific intent to monopolise it must be shown that the defendant had a “specific intent to destroy competition or build monopoly.”Specific intent may be proven by direct evidence,or it can be inferred from evidence of anticompetitive acts.
• Prohibition Against Abuse Of A Dominant Position
Any abuse by one or more undertakings of a dominant position on the market shall be prohibited. Such abuse may, in particular, consist in:
i. directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions,
ii. limiting production, markets or technical development to the prejudice of consumers,
iii. applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage, or
iv. making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations, which by their nature or according to commercial usage, have no connection with the subject of such contracts.
In the first paragraph of Article 19 abuse of a dominant position by one or more undertakings on the market is prohibited. For the prohibition to be applicable, an undertaking is required to have not only a dominant position on the market, but also be abusing its position. In the second paragraph of Article 19 there are a number of examples of practices that can be regarded as constituting abuse. The list of examples below is not exhaustive. An example of unfair purchase or selling prices is when excessive prices are set. Another example is where a dominant undertaking applies prices below those that would normally be needed to cover costs and provide a profit and where the aim is to eliminate competitors or make market entry more difficult. Production and market restrictions may also occur through exclusive dealing agreements and similar practices that tie up suppliers and distribution networks. Discrimination may also occur over prices, discounts and other commercial conditions that lead to an undertaking being treated differently for no legitimate reason. Refusal to supply is also a form of discrimination. Tie-in clauses occur for example where a dominant undertaking uses its position to compel a purchaser to purchase an additional product which does not have a natural or reasonable connection with the first product.
# http://www.cci.gov.in/index.php?option=com_content&task=view&id=98,competition commission of india
# http://www.sfgate.com/cgi-bin/article.cgi?file=/gate/archive/2000/04/03/microtext.DTL&type=printable 7th edition (1983) ECR 3451
# similar observations were made by the court in United Brands Co. and United Brands Continental BV vs the Commission of European Communities (1978)1 CHLR 429 and Hoffman La roche vs # Commission of European Communities
# Hoffman La Roche,  ECR 461
# (1983) ECR 3451
# 274 US 693, (1927)
# 251 US 417
# United States v. Grinell Corpn. 384 US 563,570 (1966)
# United States v Aluminium Company of America 148 F 2d 416 (2nd Cir 1945)
# Aspen Skiing co. v. Aspen Highlands Skiing Corpn. 472 US 585 (1985)
# Spectrum Sports,Inc v McQauillan 506 US 447 (1993)
# Times-Picayune Publ’g Co. V United States 345 US 594,626 (1953)
# M & M Medical Supplies & Serv.,Inc v Pleasant Valley Hosp. 981 F2d 160.166 (4th Cir 1992)
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