Dominant market position and related abuse
A company holding a dominant market position has such a strong position on the market that it can operate to an appreciable extent independently of its competitors, customers, and suppliers.
A dominant position in itself is not prohibited, but a company holding a dominant position may not abuse said position. Here, abuse usually means actions that do not constitute a typical form of market competition and that can hinder the preservation and development of an already weak level of competition on the market. Abuse is typically related to the exclusion of competitors from the market or to the exploitation of customers.
When does a company hold a dominant position?
The abuse of a dominant position requires that the company in question holds a dominant position on a market. Therefore, the assessment of a company’s position encompasses, first and foremost, a definition of the so-called relevant markets. Only after such a definition is made is it possible to assess whether the company under review holds a dominant position on the market in question.
What are the relevant markets?
In competition law, the definition of a relevant market is used to analyse the level of competitive constraints that the reviewed company is facing. The relevant markets are used to examine what kind of alternative immediate responses the customers and other companies can take if the company in question increases the price of the product they sell, for example.
Defining the relevant markets encompasses a definition of both the product market and the geographic market. A relevant product market includes all products and services that are considered interchangeable or replaceable by the consumer because of their features, prices and intended purpose. The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area.
The definition of a relevant market requires an analysis of which products compete or can compete with the reviewed commodities within the geographic area in question and thus limit the use of the market power of the company under review. In simplistic terms, market power refers to the company’s ability to influence the prices of its products.
How is the dominant position determined?
Once the relevant markets have been defined, it is possible to assess whether the company under review holds a dominant position on the market in question. A dominant position constitutes economic power that enables the company to prevent effective competition in the market. Given the lack of effective competitive pressure, the actions and reactions of competitors, customers and ultimately consumers have little impact on the decisions of a company in a dominant position.
The existence of a dominant position depends on the competitive pressure faced by the company. The company is under competitive pressure from actual and potential competitors and customers. In practice, the assessments focus on the following:
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The assessments focus particularly on the market position and market power of the reviewed company and its competitors, which are reflected in, among other things, the market share of the respective companies. When a company has a high market share and has retained it for a long time, it is likely to hold a dominant position. In contrast, a low market share has been viewed as a reliable indicator of the absence of a dominant position. However, the market share does not always reflect the actual market power of a company. The company may have significant market power despite a low market share due to, for example, specific product characteristics, vertical integration, or free capacity
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In addition to the existing market situation, it will also be examined whether competitors already in the market are planning to expand their activities, or if there are new competitors entering the market. If such an expansion or market entry is likely to take place and is implemented in a timely and sufficient manner, this may cause effective competitive pressure on the company under review. The likelihood of such potential competition depends on profitability, which is affected by, for example, barriers to expansion and market entry, the likely reactions of the alleged dominant company and other competitors, and the risk and costs of failure.
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Effective competitive pressure may also be caused by customers if they have sufficient bargaining power. Countervailing buyer power may be due to the size of the customers or their commercial significance for the company in a dominant position. Customers may also hold countervailing negotiation power due to their ability to quickly switch to a competing supplier, promote the market entry of new operators, and integrate vertically or make a credible threat about doing so.
What is considered abuse of a dominant position?
A company holding a dominant position has a special responsibility not to allow its conduct to impair genuine undistorted competition on the market. All assessments of potential abuse of a dominant position are comprehensive by nature, and usually the decisions cannot be based on individual formalities. The key feature is the impact that the actions of a dominant company have had on effective competition.
Abuse of a dominant position can be divided into two categories:
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A company holding a dominant position may maintain or strengthen its dominant position by preventing the market entry of a new competitor or the growth of an existing competitor, or by foreclosing a competitor in whole or in part from the market. For the actions to be regarded as abuse of a dominant position, they must deviate from the procedures normally used in economic competition.
The primary objective of preventing the abuse of a dominant position is not to protect competitors, but to protect the effective competitive process. Therefore, to prevent anti-competitive exclusionary conduct, it is, in principle, only necessary to intervene in the conduct of a dominant company if said conduct has impeded or may impede the operating conditions and competitive opportunities of competitors who are considered to be as efficient as the dominant company.
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In addition to the exclusion of competitors, the company can use its dominant position to achieve excessive profits. A typical example is excessive pricing. Abusive conduct can also be visible as other unreasonable conditions in a business relationship. However, the threshold to intervene in unreasonable pricing is generally set relatively high, as the primary task of the competition authority is not to interfere in the pricing of companies, but to safeguard the conditions of competition.
Examples of possible forms of abuse
Below, you will find a general description of procedures that may be unlawful if the company applying them holds a dominant position on the market.
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Price competition and low prices are the result of the competition process, and they are in the best interests of the customer. On occasion, competitive process leads to below-cost pricing. Sometimes a price falling below the costs may also constitute abuse of a dominant position. Predatory pricing means that a company holding a dominant position exposes itself to losses or forgoes profits in the short term to exclude existing or potential competitors from the market.
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A company obligates its customers to purchase certain goods or services exclusively or to a substantial extent only from the dominant company that imposed the obligation. Instead of an obligation, the company can achieve the same result by using conditional discounts to reward a particular purchasing behaviour displayed by customers.
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A company holding a dominant position requires its customers who purchase one product (the tying product) to also purchase another product (the tied product) from the company. In this case, only the tied product can be purchased separately. The company can also bundle the products so that they can only be purchased in fixed packages.