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Dominant position

Abuse of a dominant position

When there is competition on a market undertakings are forced to employ tactics which will attract consumers to their products/services and not to the products/services of competitors. Typically these tactics include lower prices, better quality products and more favourable sales terms and conditions. However, there are markets where an undertaking possesses such market power in comparison to its competitors that competition is restricted to the detriment of both competing undertakings and consumers. In such cases it is especially important that the undertaking with significant market power – for the purposes of competition law: in a dominant position – does not further restrict the already reduced competition in the market or abuse its market position in a manner which results in the exploitation of consumers.

The mere fact that an undertaking is in a dominant position is not in itself prohibited by the Competition Act. If an undertaking is efficient or manufactures a new product it may easily find itself in a dominant position. It is only when an undertaking abuses its dominant position that a violation of the Competition Act is committed. Undertakings which are in a dominant position have a higher standard of responsibility than undertakings with ordinary market power. This is because the contracts of undertakings which are in a dominant position may affect numerous market players and have significant and widespread negative effects on a market.

What is a dominant position?

An undertaking is considered to be in a dominant position if it is able to operate to a large extent independently from the other market players (customers, competitors, suppliers) without having to take into account their market reactions when making its decisions. Consequently, the essence of a dominant position is the ability to act independently on the market.

While the existence of a dominant position does not mean that there is no room for competition, it definitely indicates that the undertaking which is in a dominant position has a leading role in the market and is significantly stronger than its competitors. A company which is in a dominant position in a market has such significance that its decisions can influence the whole market, the manufactured and sold quantities, the prices and also the entry to and exit from the market.

It is typically the case in such markets that the undertaking which is in a dominant position also has a significant market share, while its competitors which are already operating in the market are unable to increase their production and market entry is difficult. Typical barriers of entry to a market are the following: a requirement of considerable investment, a need to produce in bulk in order to be profitable, and the existence of administrative/legal barriers to entry. It is important to emphasise that a ‘dominant position’ is an objective, legal term which arises from the structure of a market, rather than from the provisions of a contract which has been entered into by the undertakings of their free will. While it is often possible to observe a weaker party in a contract which results in a long-term business relationship this situation in itself is not qualified as amounting to a dominant position for the purposes of competition law.

If an undertaking possesses a monopoly on a certain market it is typically qualified as being in a dominant position. A monopoly is regarded as a special, extreme type of a dominant position. If an undertaking has a monopoly on a market its behaviour is subject to even stricter scrutiny as it is in an extremely powerful position in relation to consumers and market entrants.

In addition to Competition law, further sector-specific rules may apply to certain undertakings possessing monopolies (typically public-service providers) in order to prevent them from abusing their dominant positions. The conduct of the undertakings on these markets is also generally subject to the scrutiny of a sectorial – so called regulating – agency. In such sectors, the supervision of competition generally only serves a supplementary purpose as the vast majority of abuses are prevented by specific regulations as well as by the regulating authorities (e. g. by price regulation; prescription of contractual obligations etc.). Nevertheless, the scope of competition law and the jurisdiction of the GVH also extend to conducts that are not regulated by sectorial rules.

What conduct is classified as an abuse of a dominant position?

It is considered to be an abuse of a dominant position if an undertaking which is in a dominant position engages in conduct which is aimed at further restricting the already weak competition by excluding competitors from the market, preventing their expansion, or deterring them from effective competition. Such restrictive exclusionary market practices may take several forms, such as certain pricing methods (predatory pricing, margin squeezing), refusal to deal, tying agreements (to sell goods that do not necessarily belong together) obstructing market entry or excluding a competitor from the market. Irrespective of the form, they result in competitors being excluded from the market, or in their ability to expand or actively compete being significantly reduced.

However, it must be noted that it is not prohibited for an undertaking which is in a dominant position to apply tools when competing which may be disadvantageous for its competitors. The existence of a dominant position does not in itself justify finding that all of the tools used by an undertaking to compete are unlawful simply because their application is detrimental to competitors.

Another abuse of a dominant position occurs when so-called exploitative strategies are applied. In this case an undertaking which is in a dominant position enforces its strong bargaining power over its customers by forcing them to accept worse conditions: it increases prices and forces not requested services and detrimental contractual terms and conditions on them. This results in the undertaking in a dominant position exploiting its customers in order to increase its own profits.

Restrictive, exclusionary abuses

An undertaking which is in a dominant position is able to use its greater power in relation to its competitors to exclude them from the market. This may be harmful from the perspective of both competition and consumers: the variety of goods available to consumers may be reduced and the undertaking gaining an even more dominant position can force higher prices and worse conditions on its consumers.

However, the exclusion of a market player from a market is only regarded as anticompetitive if it distorts effective competition on the market. The aim of Competition law is to maintain the effective competition which is most beneficial for the consumers rather than to keep the market players alive (even if they are not efficient).

While we present a few examples of exclusionary practices below, it is not an exhaustive list by any means - undertakings which are in a dominant position may apply numerous instruments to restrict competition.


• Too low price, predatory pricing

Competition law prohibits an undertaking in a dominant position from setting its prices at a low, loss generating level for a long period of time in order to force its competitors out of the market so that it can then increase its prices again and exploit consumers.

However, in order to establish that the application of the excessively low prices by the undertaking in a dominant position amounted to unlawful behaviour under competition law, it must be proven that the undertaking applied these prices for a sufficiently long period of time and that its competitors were actually excluded from the market. Furthermore, it is necessary to establish that the application of the excessively low prices resulted in de facto losses for the undertaking in a dominant position, and that due to the market entry barriers, that the undertaking was able to keep its prices higher long enough to exploit the consumers after its competitors had exited the market.


• Margin squeezing

The manufacturer of a raw material or semi-finished products, or the owner of some infrastructure may have a dominant position and may have other undertakings depending on it or rather its products, while the undertaking which is in a dominant position, in competition with its customers, serves also the consumers. If, in such cases, it sells its products or infrastructure to its competitors on terms that make it impossible for them to compete with it for consumers, it may be qualified as margin squeezing, which is an infringement under the Competition Act. Margin squeezing generally takes the form of the application of a too low or negative margin.

An only temporary, individual (lasting for a short period of time) and low margin carrying the features of a margin squeeze cannot in itself justify the capability to restrict competition. It is important that an infringement may be found only if the application of the excessively low margin forms part of the strategic pricing conduct of the undertaking which is in a dominant position.

If an undertaking which is in a dominant position is responsible for supplying its competitors with products/services which are essential for them to able to exist and compete on the market, it must not charge them such high prices that it makes it virtually impossible for them to compete on the market.


• Tying

An undertaking which is in a dominant position in a market may try to use its dominance to also restrict competition in other markets. This may be the case, for example, if the undertaking in question will only sell its product on the market of which it is in a dominant position if its customers also buy another product belonging to a different product market. In such a case the manufacturers on the market of the “other” product may be excluded from that market despite the fact that the undertaking is not in a dominant position on that market. Moreover, in this case the customers may also be forced to purchase a product that they did not wish to purchase and this may be qualified as exploitation.

An undertaking which is in a dominant position must not apply sales practices which may exclude its competitors from another market. Tying may be especially detrimental to competition if a close connection exists between the two markets affected by the conduct. In such a case, by exploiting the dominant position which exists on the one market it is even easier to exclude the undertakings that compete on the other market.


• Prevention of market entry, exclusion from the market

In order to protect their especially good positions on markets, undertakings which are in dominant positions sometimes try to prevent the market entry of new undertakings by applying unlawful instruments.

Both during and after the liberalisation of the regulated markets (railway, electricity) there were several occasions when it was suspected that operators which had previously had exclusive service rights had harmed competition by tying consumers (through long-term contracts) and by discriminating against, and by encumbering the operation of new market entrants.

To provide another practical example, a waterworks company of a town entered into an individual consumption measurement contract only with those consumers who installed one of the two types of sub-meters specified by the company. At that time there was a total of 77 sub-meter products distributed in Hungary and the conduct of the company resulted in a restriction of competition among the manufacturers and distributors of the sub-meters and hindered new entry into the relevant geographic market (the town and its surrounding area).

Consequently, an undertaking which is in a dominant position must not apply business conditions or engage in market conduct which could hinder the market entry of competitors or affect their ability to compete effectively for consumers on the market in question.


• Refusal of business relationship

An undertaking which is in a dominant position must not without justification refuse to create or maintain a business relationship that is appropriate for the type of the given transaction. In cases concerning the creation of a business relationship a balance between the two interests which are protected by law must be found. On the one hand, an undertaking which is in a dominant position also has the right to dispose of its ownership. On the other hand, the provisions of the Competition Act may impose additional obligations on the undertaking which is in a dominant position in order to protect the public interest related to the preservation of effective competition. Pursuant to the Competition Act, an undertaking which is in a dominant position may be punished for its refusal to create or maintain a business relationship, if:

- it cannot be justified with objective, reasonable business grounds; and

- besides the harm caused to the undertakings concerned, it has an appreciable negative effect on competition and also on the efficiency of competition on the market.

A refusal to create or maintain a business relationship may be justified if it is aimed at increasing the effectiveness of the undertaking or at the substitution of the previous, not properly performing business partner with another.

A good practical example is when a funeral home undertaking did not allow any other undertaking to provide funeral services in the cemetery operated by it. The undertaking operating the cemetery refused to enter into a contract with any undertaking without providing any relevant economic reason. Consequently, the GVH found that that the undertaking had infringed the law.

Exploitive abuses causing direct harm to consumers

In a market where there is an undertaking with a dominant position consumers are considered to be in a particularly vulnerable situation. This is because their ability to purchase from an alternative provider if the product/service they receive is inappropriate (e.g. bad quality, expensive) is reduced. In such cases there is always a risk that the undertaking which is in a dominant position may try to make use of its market position by setting disadvantageous conditions for its consumers in order to increase its own profits (exploitation of consumers). These kinds of exploitative abuses are also prohibited by competition law and we will describe some of them below.


• Excessive pricing

When an undertaking is in a dominant position the most obvious way in which it can exploit consumers is by applying extremely high prices. Such prices can be applied in the knowledge that the undertaking will only lose a few consumers due to the limited competition that exists in the market. Competition law prohibits undertakings which are in a dominant position from exploiting consumers through the application of excessive prices.

In practice it is not easy to establish when a price is to be regarded as excessive. To look at it in a simplified way, it may be stated that a price is excessive if it exceeds the total sum of the economically justified costs of the undertaking and the (“fair”) profit resulting from the return of the investments that are proportional with the risk associated with the specific industry. Using a different approach, a price may be regarded as unfair (excessively high), if the undertaking which is in a dominant position increases its previously enforced price by a larger extent than is justified by the objective changes that have taken place in its economic circumstances.

Therefore, an undertaking which is in a dominant position needs to be very prudent when setting its consumer prices and has to make sure that the applied prices are not unfair and are economically justified.

To provide an example, the GVH established that a dominant cable TV undertaking had applied excessive pricing as it had increased its subscription fees at a rate which was much higher than the rate of inflation even though its costs had not increased.


• Stipulation of unjustified advantages, forcing to accept disadvantageous conditions

It may give rise to competition concerns if an undertaking which is in a dominant position unjustifiably stipulates unilateral advantages for itself. Undertakings which are in a dominant position need to be prudent when concluding contracts and must ensure that they are not placing their consumers in unjustifiably disadvantageous positions by making use of their market position. In the following, we will present several examples from the practice of the GVH where these kinds of competition concerns occurred in relation to a dominant position.

A commercial bank stipulated in a certain type of contract for housing loans that were practically exclusively sold by it that it had the right to unilaterally change the interest rate of the loan and its handling fee depending on the financial market situation. The GVH found that the stipulation amounted to an abuse of a dominant position.

Another commercial bank introduced a closing fee and simultaneously a payment (transfer) commission for the termination of foreign exchange accounts having a balance of less than USD 50, consequently, its customers having such foreign exchange accounts could obtain their money only with a loss. The GVH found that the bank’s conduct had infringed the law.

An energy supply undertaking forced its customers to accept a detrimental condition (price increase) by terminating the energy supply that was indispensable for their production activity.

The GVH found that there had been an abuse of a dominant position by a cable TV operator when it unilaterally changed the composition of the programme packages to the detriment of its subscribers without surveying the needs of the consumers.

• Price discrimination

The Competition Act prohibits the discriminatory application of prices or other terms and conditions on trading partners which result in a competitive disadvantage for certain trading partners. It is important to note that this prohibition only applies to transactions of the same value or nature, i.e. if an undertaking which is in a dominant position offers discounts to those trading partners who purchase in large quantities; this will not be deemed to be discriminatory.

Examples

The following table demonstrates some typical conducts which are qualified as abuses of a dominant position, and their corresponding conducts which are not prohibited by competition law.

Do’s

Don’t’s

The application of reasonable price increases when in a dominant position due to an unavoidable increase in costs.

The application of excessively high prices (which significantly exceed the sum of the costs and a reasonable profit) when in a dominant position.

Increasing prices in accordance with the rate of inflation when in a dominant position.

Increasing prices to a level that significantly exceeds the rate of inflation when costs are unchanged or decreasing, when in a dominant position.

The application of loss-generating low prices in the short term, which is not able to result in the exclusion of competitors. E.g. in case of the introduction of a new product.

The application of loss-generating prices under the cost level when in a dominant position with the aim of excluding competitors from the market, and after the undertakings have been excluded, increasing the prices again, resulting in the exploitation of consumers.

The practice of tying by an undertaking which is not in a dominant position.

The application of tying as a sales practice by an undertaking which is in a dominant position, resulting in the exclusion of the competitors from the market of the tied product.

The refusal of an undertaking which is in a dominant position to conclude a contract based on objective, business-related reasons – e.g. to avoid losses.

The refusal to conclude a contract when in a dominant position without any objective, business reason.

Applying discriminatory prices to customers if it does not concern deals with the same nature and value – e.g. the application of quantity-based discounts for retailers.

Applying discriminatory prices to two customers in case of deals with the same nature and value (price discrimination) when in a dominant position.

The stipulation of advantages which are justified by the nature of the business relationship – for example registration of mortgage in case of loans or the stipulation of a penalty for the unsatisfactory performance of a contract.

The stipulation of unjustified unilateral advantages by an undertaking which is in a dominant position in its contracts with its customers.