Article 102 of the Treaty on the Functioning of the European Union

Article 102 of the Treaty on the Functioning of the European Union (formerly Article 82 of the Treaty establishing the European Community)[1] is aimed at preventing undertakings who hold a dominant position in a market from abusing that position. Its core role is the regulation of monopolies, which restrict competition in private industry and produce worse outcomes for consumers and society. It is the second key provision, after Article 101, in TFEU competition law. The text of Article 102 provides the following,

Application

The wording of the provision gives rise to a number of issues to consider in the application of Article 102; namely, the concept of ‘one or more undertaking’, ‘Relevant market’, ‘Dominant position’ and ‘Effect on trade between member states’.

One or more undertaking

Undertaking

An entity must be an ‘undertaking’ to be subject to Community competition law and therefore Article 102. The European Court of Justice (ECJ) in Hofner v Elser states that “The concept of an undertaking encompasses every entity engaged in economic activity regardless of the legal status of the entity and the way in which it is financed.”[2] The European courts have ruled that Acts of, solidarity (such as the provision of public health care),[3] public interest (such as the improvement of air navigation safety),[4] and the protection of the environment[5] are not economic in nature and therefore fall outside the application of European Community competition rules.

Collective Dominance

Article 102 is not confined to actions of single undertakings as the inclusion of the phrase 'one or more undertaking' leads to the inclusion of 'collective dominance,' which tends to occur were there are a small number of businesses in a market who make concerted strategic decisions taking into account the actions of other members of the oligopoly.[6] The commission confirmed the validity of this principle in Airtours v Commission and in doing so set down a strict set of evidential conditions:[7]

  • Firstly, each member of the oligopoly must be aware of how the other members are behaving in order to adopt the same common policy.[8] There must be sufficient transparency in the operations between members of the oligopoly to be aware, sufficiently precisely and quickly, of the way in which the other members' market conduct is evolving.
  • Secondly, the situation of coordination must be sufficient and sustained over time.
  • Thirdly, the commission must prove that the foreseeable reaction of reaction of current and future competitors, as well as consumers would not jeopardise the result expected from the common policy.

Relevant Market

Defining the relevant market is a vital precondition to assessing dominance.[9] Market definition can be used to establish the boundaries of competition between undertakings, with the purpose of identifying the competitive constraints faced by the firms.

The commission measures these competitive constrains in both the Market[10] and Geographical dimension.[11] With the relevant market within which to assess competition being a combination of both approaches. With the competitive constraints assessed via demand substitution,[12] supply substitution[13] and potential competition.[14]

The Product Market

The Commission defines the relative product market as, a market that comprises all "products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use".[15]

Two common tests used to assess the interchangeability of product market are:

  • The 'hypothetical monopolist' test which is whether a small but significant increase in price is likely be allowed by the hypothetical monopolist company to profit from this. If consumers can and would move away from the hypothetical monopolist's product and onto other products then their market is more widely defined.
  • The 'intuitive approach', which focuses on brand loyalty and the use of the products

The Geographical Market

The Commission defines Geographical market as a "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."[16]

Cellophane Fallacy

The existence of the cellophane fallacy implies that market definition in Article 102 cases needs to be particularly carefully considered and that any single method of market definition, including in particular the SSNIP-test, is likely to be inadequate. It is necessary to rely on a variety of methods for checking the robustness of possible alternative market definitions.[17]

Dominance

The EC treaty gives no definition of ‘dominance’ leaving it to the commission subject to the relevant control of the European courts to determine whether a ‘dominant position’ exists by reference to the relevant market factors, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer."[18] In Hoffman-la Roche the ECJ ruled that a ‘very large’ market share would give rise a rebuttable presumption of dominance.[19] The ECJ then established in AKZO following from Hoffman that the presumption of dominance arises at a market share of 50%.[20] Where a firm has a dominant position, it has "a special responsibility not to allow its conduct to impair competition on the common market"[21]

Although an undertakings market shares is a good indication of ‘Dominance’, it is not conclusive and at best serves as a first indication of market power.[22] A finding of dominance derives from a combination of several factors, Para 12 of the Commissions guidance highlights three factors that the Commission will consider; Actual Competitors, Potential Competitors, and Countervailing Buying Power.[23]

Jurisprudence of European courts
Market share %Observations
85-90% Usually conclusive of market dominance.[24]
75% Indicative of dominance.[25]
More than 50% Strong evidence of dominance where held for three years, except for exceptional circumstances[26]
40% or moreEvidence of dominance. Considered with other factors[27]
20% Possibility of dominance left open. Considered with other factors[28]
10% Too Small[29]

Commissions enforcement priorities

The Commission has sought to move towards a more effects based test for dominance and in doing so has published its Guidance on Enforcement priorities for article 102, However as the commission cannot bind the European courts the current jurisprudence is unaffected. This has led to some commentators questioning the need for the guidelines and some evening going as far to stress they should be removed as it only serves to further complicate the law.[30] However, as noted by Advocate General Mazak in his opinion in TeliaSonera although the commissions’ guidance may not bind the court it provided a ‘useful point of reference’[31] and It will also form the basis of whether the Commission will pursue claims in the future.[32]

Effect on trade between member states

The court of justice ruled in Commercial solvents[33] that the requirement of an appreciable effect on trade between member states would be satisfied where conduct brought about an altercation in the structure of competition in the internal market.

The commission provides further guidelines on the effect of trade concept contained in Articles 101 and 102 TFEU, detailing the general principles,[34] the concept of trade between member states.[35] The notion of May effect[36] and the concept of appreciability.[37]

Abuse

Abusive conduct is usually organised under different categories, from those in Article 102, and more. As was stated in Continental Can [1973] the categories are not closed.

Price exploitation

Under Article 102(a) "directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions" is considered abusive. Price exploitation is one example. It is difficult to prove at what point a dominant firm's prices become "exploitative" and this category of abuse is rarely found. In one case however, a French funeral service was found to have demanded exploitative prices, and this was justified on the basis that prices of funeral services outside the region could be compared.[38]

Limiting production

Under Article 102(b), "limiting production, markets or technical development to the prejudice of consumers" is considered an abuse by a dominant undertaking. An example was found in Porto di Genova [1991], where a shipping port refused to raise expenditure and update technology. This limited the amount of cargo that the port could deal with to the detriment of some of its users.

Price discrimination

Price discrimination falls under Article 102(c), whereby an abuse is "applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage". An example of this could be offering rebates to industrial customers who export your company's sugar, but not to Irish customers who are selling their goods in the same market as you are in.[39]

Tying

Under Article 102(d) "tying" is defined as "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." Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission[40] leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents.[41] When it set up its own rival in the tuberculosis drugs market, Commercial Solvents was forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated.

Predatory pricing

Predatory pricing is a controversial category. This is the practice of dropping prices of a product below costs so that one's smaller competitors cannot cover their costs and leave the market. The Chicago School holds predatory pricing to be impossible, because if it were then banks would lend money to finance it. However, in France Telecom SA v Commission[42] a broadband internet company was forced to pay €10.35 Million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors"[43] and was being subsidised to capture the bigger share of a booming market.

See also

Notes

  1. ↑ "Changes after the entry into force of the Treaty of Lisbon (1 December 2009)". European Commission.
  2. ↑ "Para 21, Case C-41/90 Hofner and Elser".
  3. ↑ "Case T-319/99, FENIN v Commission".
  4. ↑ "Case C-364/92 Eurocontrol".
  5. ↑ "Case C-343/95 Diego Calì & Figli".
  6. ↑ "Section 4.3 DG competition discussion paper" (PDF).
  7. ↑ "Para 62 Case T-342/99 Airtours plc v Commission".
  8. ↑ "footnote 38, para 66, Case T-228/97 Irish Sugar".
  9. ↑ "para 32 Case 6-72 Continental Can".
  10. ↑ "para 7 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  11. ↑ "para 8 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  12. ↑ "para 15-19 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  13. ↑ "para 20-23 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  14. ↑ "para 24 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  15. ↑ "Para 7, Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  16. ↑ "Para 8 Commission Notice on the definition of relevant market share for the purpose of Community competition law (97/C 372/03)".
  17. ↑ "Para 47 DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses" (PDF).
  18. ↑ "C-27/76 United Brands".
  19. ↑ "Para.41 Case 85/76 Hoffmann-La Roche".
  20. ↑ "para 60 Case C-62/86 AKZO".
  21. ↑ "Case 322/81 Michelin v Commission".
  22. ↑ "Para 11 Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02)".
  23. ↑ "Para 12, Communication from the Commission – Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02)".
  24. ↑ "Case C-85/76, Hoffmann-la Roche".
  25. ↑ "Case C-85/76".
  26. ↑ "para 60 Case C-62/86 AKZO Chemie BV v Commission".
  27. ↑ "Case C-85/76".
  28. ↑ "90/363/EEC Metaeurop".
  29. ↑ "Case C-75/84 Metro".
  30. ↑ Geradin, Damien (2010-03-12). "Is the Guidance Paper on the Commission's Enforcement Priorities in Applying Article 102 TFEU to Abusive Exclusionary Conduct Useful?". Rochester, NY.
  31. ↑ "See fn.21 Opinion of Mr Advocate General Mazák delivered on 2 September 2010, Konkurrensverket v TeliaSonera Sverige".
  32. ↑ "Para 2 Communication from the Commission – Guidance on the Commission's enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02)".
  33. ↑ "para.30-35 Commercial Solvents Corporation v Commission".
  34. ↑ "Article 2.1 Commission Notice Guidelines on the effect on trade concept contained in Article 81 and 82 of the Treaty (2004/C 101/07)".
  35. ↑ "Article 2.2 Commission Notice Guidelines on the effect on trade concept contained in Article 81 and 82 of the Treaty (2004/C 101/07)".
  36. ↑ "Article 2.3 Commission Notice Guidelines on the effect on trade concept contained in Article 81 and 82 of the Treaty (2004/C 101/07)".
  37. ↑ "Article 2.4 Commission Notice Guidelines on the effect on trade concept contained in Article 81 and 82 of the Treaty (2004/C 101/07)".
  38. ↑ C-30/87 Corinne Bodson v SA Pompes funèbres des régions libérées (1987) ECR 2479
  39. ↑ Irish Sugar (1999)
  40. ↑ Case T-201/04 Microsoft v Commission Order, 22 December 2004
  41. ↑ Commercial Solvents (1974)
  42. ↑ Case T-340/03 France Telecom SA v Commission
  43. ↑ AKZO (1991)
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