Dominance must be considered with reference to the relevant market, once ascertained and defined. Dominance has been defined 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 and customers.
The dominant undertaking is typically in a position to set prices. It is not appreciably constrained by the market as to the prices it may charge, in the same way as applies where there is effective competition. This position may enable the dominant undertaking to prevent competitors from entering the market. It may be in a position to raise barriers to entry by potential competitors. It may accordingly, be able to perpetuate its dominance.
In ascertaining the existence of market power, the question of market share is central. Market share does not necessarily mean market power, but the two will commonly coincide. If the market share has varied over time, then this may demonstrate lesser market power. All things being equal, the higher the market share, the more likely it is that competition will be restricted.
A share of more than 70% of the relevant market may create a so-called “super dominance”. The EU Commission require such undertakings to exercise increased responsibility so as not to manipulate or interfere with an already weak market.
At levels of market share between 50% and 70%, is likely to lead to a finding of dominance. Such a very large share may even be presumptively dominant, in the absence of exceptional circumstances. Exceptional circumstances may reflect competition from inside or outside the market. The more long-standing and enduring the market share, the more likely there is to be a finding of dominance.
There may be dominance with a market share considerably below 50%. This may occur where an entity has a share of (e.g.) 40%, but where other market participants have significantly smaller shares. In contrast, a finding of dominance is less likely where other market participants have similar market shares or market shares approaching this level. The European Commission takes the view that dominance is not generally likely if the undertaking’s market share is below 40%.
Barriers to Entry
Dominance may be temporary so that its duration or prospective duration is considered. The ease of entry of new competitors is taken into account. The lower the barriers to entry, whether legal, practical or cost-based, the less likely the finding of dominance. The lower the barriers to entry, the higher the likelihood that others may enter the market. This of itself exerts a competitive effect. The market is capable of being contested.
Where there are licensing, legal, cost and other effective barriers to set up and entry, it is more likely to be the case that an existing undertaking is dominant. The extent of the barriers to entry is relevant. The Commission takes account of a short to medium term timescale, in order to consider how realistic entry to the market may be.
Barriers may exist in terms of set up costs, required capitalisation and risk factors. There may be economies of scale, such that the business may only be effectively undertaken with a significant share of the market. This may commonly arise in the case of public utilities and similar businesses. Some markets may need considerable finance and investment in order to become established. The non-availability of capital and finance may be a barrier to entry.
There may be intellectual property barriers to entry. Most significant is the monopoly grant of intellectual rights, such as patents. There may be licensing requirements which are insurmountable, where as in commonly the case, the market incumbent owns the relevant rights. Governments may limit and ration licences for policy reasons. Patents legislation and competition law may require the compulsory grant of IP licences.
A greater degree of product differentiation (and the corresponding diminution of interchangeability) may create a barrier to entry. This may arise from brand loyalty and other intangible features.
Dominance and Oligopoly
The conduct of the undertaking may be indicative of dominance. Market participants who undertake predatory action in respect of potential competitors are more to be found to be in a dominant position.
Dominance of itself does not attract any sanctions. However, the actions of a dominant undertaking are subject to particular scrutiny. Arguments have been made that the effect of this scrutiny and requirement to monitor actions may circumscribe it in doing that, which would otherwise be efficient and in the interest of consumers.
An oligopoly is where a number of market participants together have a dominant position. They may collectively exercise market power such that they would be deemed dominant if they were a single entity. There may be limited price competition. Oligopolies are found in many sectors which are dominated by a small number of powerful participants (e.g. the main supermarket chains).
Oligopolists may not compete strongly on price. They could raise sales considerably by cutting prices, but in practice, their competitors are likely to follow them in parallel. Similarly, price increases may lead to a significant loss of market share and revenue. Oligopolists are frequently very cognisant of each other’s actions.
Game theory describes scenarios where the conduct of one market participant has consequences for others and itself. It is used to analyse the behaviour and incentives facing oligopolists. It predicts that each participant is incentivised to maximize their profits by gradually by increasing prices in tandem with others. Each increases revenue, but maintains market share. Coordination may happen spontaneously, without any agreement, collusion or concerted practices, so that there would not breach Article 101 of the EU Treaty.
The Commission has developed powers to deal with collective dominance. The wording of Article 102 refers to the abuse “by one or more undertakings of a dominant position. Originally, the courts rejected this interpretation and held that abuse of a dominant required unilateral action. Later cases, however, held that there could be an abuse of a dominant position in the case of collective dominance. There may be collective dominance where undertakings enter the market as a single entity, and not separately. This is in addition to the possibility that the arrangement may breach Article 101 as a cartel/anticompetitive agreement.
The European Court of Justice (ECJ) has held that there is nothing in principle to prevent two or more independent economic entities on a specific market from being united by such economic links such that they together hold a dominant position, relative to other participants in the same market. The linkages may be, but need not be formalised agreements or arrangements.
The dominant position may arise from the nature and terms of an agreement or arrangement, from the way it is implemented, and from links or practices which give rise to or result from a connection between undertakings. The existence of an agreement or other formal links is not indispensable to a finding of collective dominance. It may be based on other connecting factors, which may require an economic assessment of the structure of the market.
In order to establish collective dominance, the ECJ has indicated that the following factors should be considered. Each member of the dominant oligopoly must know how the others are behaving. There must be mutual monitoring of actions. There must be an incentive for the oligopolists to maintain a single policy. The foreseeable reactions of competitors, present and future and of consumers will not generally bee such as to affect the benefits of the common policy.
Commercial State-sponsored enterprises may be dominant. State-owned monopolies may jeopardise competition. They are doubly objectionable under EU law, in that they may lead to division and segmentation of the European Union market, impeding the operation of the internal market.
State regulation is not prohibited by the Article 102. States are subject to obligations to refrain from measures which may just jeopardise the attainment of the EU’s objective. The Commission has powers to enforce these obligations, where they adversely affect competition.
State bodies and undertakings which are entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly, are subject to competition rules, but only insofar as this does not obstruct the functions assigned to them. In broad terms, states must not put such undertakings in a position to do that what which they could not do by their own conduct, without the infringing Article 102.
Article 102 (abuse of a dominant position) has been applied in respect of state monopolies. There may be a breach, when state measures create rights which inevitably lead to an abuse of a dominant position. Where, notwithstanding unsatisfied demand, competitors are barred from entry, there may be an abuse of a dominant position. The entities must be manifestly unable to satisfy demand on the market. There may be statutory provisions and restrictions on competitors.
In the case of State undertakings, which have been entrusted with the operation of services of general economic interest or have the character of revenue-producing monopolies, competition rules apply, insofar as their application does not obstruct the performance in law or in fact of their particular task or function.
The courts have interpreted this exception, narrowly. The anti-competitive behaviour must be necessary for the performance of the public tasks. It is not enough that it facilitates those tasks.
The defence may be available or where the services of general economic importance, may be threatened by competitors who seek to pick profitable elements of the business, without bearing the costs of providing for the operation of a general service. However, competition law rules should prevail, except to the extent that the general service is jeopardised.