Abuse of dominance

1. Nature of the prohibition of abuse of monopoly or dominant position

Article 21 of the Law on Protection of Competition (LPC) prohibits the conduct of undertakings enjoying monopoly or dominant position, as well as the conduct of two or more undertakings enjoying a collective dominant position that may prevent, restrict or distort competition and impair customers’ interests. With that end in view, it shall be established that the undertaking enjoys monopoly position under the meaning of Article 19 of the LPC, or dominant position under the meaning of Article 20 of the LPC.

The position of an undertaking which by law has the exclusive right to carry out a certain type of economic activity shall be monopolistic. A monopoly position may be granted only by law and any other kind of granting of monopoly position shall be null and void. Often such monopoly position exists in the sectors of railway transport and the national postal and telecommunication services.

 On the other hand, two or more undertakings may enjoy a collective dominant position– without being individually dominant. For those undertakings to be regarded as enjoying collective dominance they have to be linked in such a way as to adopt (in some respects) a common policy in the relevant market.

Either actual or potential negative effect, while at the same time an actual or potential negative effect on the interests of customers shall be proven. This requirement fully corresponds to the provisions of Article 82 of the EC Treaty.

2. Inapplicability of the prohibition of abuse of monopoly or dominant position

The prohibition of abuse pursuant to Article 21 of the LPC (Article 82 of the EC Treaty) shall be declared inapplicable and the undertaking shall not be sanctioned in the presence of objective external circumstances which have prevented the undertaking enjoying a dominant position from adhering to its commitments and from undertaking a conduct that violates the prohibition of abuse. The presence of an external circumstance exerting one and the same influence on all participants in the market has to be proven by the undertaking, so that it can give reasons that its conduct is a form of protection against objective circumstances and not a purposeful anti-competition conduct.

Such inapplicability is in place when the defendant undertaking aims at proving that its conduct was motivated by the need to react to the counter conduct of its competitors and was not aimed at restricting competition. In addition, it has to be proven that the conduct of the undertaking has produced less negative effect on the customers compared to the effect that would have been produced if such a conduct had not been undertaken.

The principle of the unconditioned application of Article 21 of the LPC, respectively Article 82 of the EC Treaty, shall not apply to the provision of Article 2 (1) of the LPC, i.e. when the infringement has been committed by undertakings to whom the state or the municipality have assigned services of public interest insofar as the application of the Law does not impede de facto or de jure the fulfilment of the tasks assigned to them and competition in the country is not affected to an appreciable extent. For this exception to be applied, the assignment of services of public interest as well as the impossibility of those services to be offered without damaging competition has to be unconditionally established, along with the fact that this infringement is significant.

3. Forms of abuse

The LPC points out to some of the most common forms of abuse of monopoly or dominant position as the list of forms is not exhaustive:

- Direct or indirect imposing of purchase or selling prices or other unfair trading conditions.

An undertaking enjoying a dominant position, taking advantage of its strong market position may impose on its clients (wholesalers or end customers) trading conditions that are unfavourable to them. The most common pricing abuses are the imposition of unreasonably high or unreasonably low prices and the price squeeze. In its practice of investigating unreasonably high or unreasonably low prices, in most of the cases the CPC has used the approach of comparing the price with the cost price of the product. With that end in view, the announced selling price of the product is compared to the factual cost of its production and realization.

An undertaking enjoying dominant position is in the position to impose a variety of unfair trading conditions on its customers which they wouldn’t accept if there was alternative supply of the goods and services offered by the dominant undertaking. Export prohibitions and restrictive selling conditions can be used as an example for imposing unfair trading conditions. In most of the cases unfair trading conditions are imposed in the sectors of electric and heat energy, auto transport, etc.

- Limiting production, trade and technical development to the prejudice of customers.

As an example for limiting production and trade to the prejudice of customers the following practices can be pointed out: restricting trade through selective distribution systems which are not necessary for the normal distribution of the product; obligations for purchase/ sale; loyalty discounts. The so called “English clause” also falls within the group of forms of abuse of dominant position. It refers to the situation where a dominant undertaking requires a customer to report a “better” offer which the customer may receive from a competitor and allows the customer only to accept such an offer when the dominant undertaking cannot match it. The presumption is that the clause has the same effect as the exclusivity clauses since the dominant undertaking will only have to reduce its prices in case there is a risk of losing the customer.

Limiting the access to a given technology or impeding technological development can be pointed out as an example of limiting technological development to the prejudice of customers

- Applying to certain partners dissimilar conditions for equivalent transactions, thereby placing them at a competitive disadvantage.

This form of abuse of dominant position requires a proof that the compared transactions are identical in nature. Secondly, it has to be established that the contractors of the dominant undertaking under the compared transactions are competitors among themselves. And last but not least, it has to be established that objective reasons are in place for the dissimilar conditions. With that end in view, the clauses in the agreements related to transportation and marketing costs, etc. shall be compared.

-Making the conclusion of contracts subject to acceptance by the other party of supplementary obligations or to the conclusion of additional contracts which, by their nature or according to common commercial usage, have no connection with the object of the main contract or with its performance.

This form of abuse includes tied selling and package selling as in both cases the dominant undertaking which is a leader in the market of the product in question, through tying its purchase with the purchase of another product, aims at strengthening its positions in the market of the latter product, thus damaging the competitive environment of this market.

- Unjustified refusal to supply goods or to provide services to actual or potential customers in order to impede their economic activity.

In most of the cases the refusals to supply goods boil down to a refusal to supply a good, to provide a service to an existing customer, or to enter into contractual relations with a potential customer.

A refusal to supply goods or provide services shall be qualified as an abuse in case of proving that there is an objective possibility for the good/ service to be supplied and that there is an intention on the part of the dominant undertaking to remove from the market one of its contractors thus damaging the market on which the latter carries out its activities. It has to be pointed out that there shall be significant influence on the activities of the contractor as it would face serious difficulties in implementing its activities if the respective goods/ services have not been supplied.

4. Different types of abuse

Abuses can be divided into several types:

- Exploitative abuses. Exploitative practices are related to a conduct through which unjustifiably significant profit is made due to the lack of effective competition on the market. Usually this happens through imposing unjustifiably high prices In most of the cases such abuses can be observed in the naturally monopolistic markets, such as the markets of heat energy and electricity supply. The exploitative abuse leads to damages mainly to the trade partners of the dominant undertaking – customers and suppliers. The fact that the entry to the market of the other participants is hindered because they are tied to the supplies from the dominant undertaking also creates a risk of causing damages to potential competition.

- Structural abuses. This type of abuses is not aimed at gaining direct profit from the economic position of an undertaking, but at using this dominant position to eliminate the competitors in the market. It can be concluded that this type of abuse damages mainly the competitors because it is not aimed directly at the customers and the suppliers. Depending on the way of pushing competitors out, exclusive abuses are subdivided into two types, namely non-pricing and pricing abuses.

The most common non-pricing abuses are:

- tying the supplies of one good with another good, both goods being supplied by the dominant undertaking. In this way, the dominant undertaking forces the customers of one product to purchase as well.

- refusal to deal. This happens when the owner of a significant facility unjustifiably refuses access to it, which leads to damaging the competitive environment of the market on which the user of the facility operates. This situation may lead even to dropping of the user out of the market to the extent to which without being given the opportunity to use the significant facility it might not be able to carry out its economic activities.

The price-squeeze can be used as an example of abuses related to pricing the price-squeeze (margin squeeze) can be used as an example of abuses related to pricing.

 In the case of a price-squeeze the dominant undertaking imposes unjustifiably high wholesale prices on its competitors, which, on their part, cannot offer to their end customers retail prices competitive to the retail prices offered by the dominant undertaking. Other types of abuses related to pricing are the introduction of loyalty discounts as well as offering of two or more tied products on the part of the dominant undertaking.

The so called “predatory pricing” can be pointed out as one of the most common abuses related to pricing. As far as this way of price-formation is concerned, for a short period of time the respective good or service is being sold at the disadvantage with the aim of pushing the competitors out of the market or discouraging other competitors from entering the market. The aim of such a conduct, after achieving the above-mentioned result, is the realization of higher profit through a sudden price increase, under the condition that the latter couldn’t have been increased if the predatory pricing had not been done beforehand.

A distinction has to be made between predatory pricing and the price policy of undertakings which is influenced by supply and demand, and for which the reduction of prices is a typical and normal strategy aimed at attracting customers. The difference is that in the first case, the purposeful reduction of prices and selling at a disadvantage is aimed at pushing competitors out of the market, whereas in the second case, the reduction of prices is aimed at attracting customers through lawful means and in the presence of competition.

The main difference between predatory pricing as a form of abuse of dominant position and the selling of a certain quantity of goods or services under their cost price for a certain period of time as a form of unfair competition is in the market position of the infringer and the degree of impact on the market competition.