A Glance at Abuse of Dominant Position under Competition and Antitrust Laws

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The term abuse of dominant position refers to anticompetitive business practices in which a dominant firm may engage in order to maintain or increase its position in the market.[i] Abuse of dominance or monopolization is punished under competition laws worldwide.  In the US, Section 2 of the Sherman Act penalizes a person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce. The offense of monopoly under Section 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.[ii]

 

Being a monopolist is not sufficient to be subjected to a Sherman Act violation. It must be coupled with the act of monopolization. Thus, in Verizon Communications Inc. vs. Trinko[iii], the US Supreme Court noted:

 

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

 

Monopoly and monopolization must be present. The firm must be guilty of a conduct that goes beyond the act of a monopolist in setting prices above competitive level.  It must also act in such a way that has anti-competitive effects as enunciated by the US Supreme Court in United States vs. Aluminum Co. of America[iv].

 

On the other hand, Article 102 of the Treaty on the Functioning of the European Union (“ Art 102 of the TFEU”) punishes any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part consisting of imposing unfair prices and trading conditions, limiting production, applying dissimilar conditions to equivalent transactions, and conclusion of contracts subjecting acceptance to supplementary obligations, to the prejudice of consumers. Specifically, Art. 102 of the TFEU states:

 

“Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in:

 

(a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;

(b) limiting production, markets or technical development to the prejudice of consumers;

(c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;

(d) 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.

 

The European Union approach is driven by the theory of free movement of goods, services and people. Furthermore, dominant firms are vested with a special responsibility not to allow its conduct to impair genuine undistorted competition in the internal market[v]. In addition, the EU perspective on abuse of dominance at the Court of Justice level stresses the process of competition, seeking to enable all market actors to compete on their merits, particularly efficient and potentially efficient competitors.[vi]

 

In the Philippines, abuse of dominant position is punishable under Section 15 of Republic Act No. 10667, otherwise known as the Philippine Competition Act.  Specifically, Section 15 prohibits one or more entities to abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition:

 

(a) Selling goods or services below cost with the object of driving competition out of the relevant market;

(b) Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws;

(c) Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction;

(d) Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially;

(e) Imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom, or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebate upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially;

(f) Making supply of particular goods or services dependent upon the purchase of other goods or services from the supplier which have no direct connection with the main goods or services to be supplied;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and producers;

(h) Directly or indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or consumers; and

(i) Limiting production, markets or technical development to the prejudice of consumers.

 

As can be gleaned above, predatory pricing, imposing barriers to entry, restricting or refusal to deal, price discrimination, and exploitative conduct that would substantially prevent, restrict or lessen competition exercised by entities in a dominant position are prohibited.

 

It must be noted that the following acts are not considered as abuse of dominant position under Section 15:

 

1. Acts whereby the dominant entities have no object of driving out competitors out of the market and the price established was in good faith to meet or compete with the lower price of a competitor in the same market selling the same or comparable product or service of like quality, as determined by the Philippine Competition Commission.

 

2.  Barriers to entry as a result of or arising from a superior product or process, business acumen, or legal rights or laws of the dominant entities.

 

3.  Permissible price differentials such as socialized pricing for the less fortunate sector of the economy; those that reflect differences in the cost of manufacture, sale, or delivery resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered to the buyers or sellers; those offered in response to the competitive price of payments, services or changes in the facilities furnished by a competitor; and  those made in response to changing market conditions, marketability of goods or services, or volume.

 

4.  Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those which give each party the right to unilaterally terminate the agreement.

 

5.  Agreements protecting intellectual property rights, confidential information, or trade secrets; and

 

6.  Any conduct which contributes to improving production or distribution of goods or services within the relevant market, or promoting technical and economic progress while allowing consumers a fair share of the resulting benefit

 

Determining whether a firm has a dominant position is done with reference to a defined market. That is, the firm has a dominant position or is a monopoly or has power only with respect to a market.[vii] Usually, the market pertains to the product and geographic markets.  In addition, monopoly has been associated with substantial market power and dominance. Market power is the power “to force a purchaser to do something that he would not do in a competitive market.[viii] The existence of such power ordinarily is inferred from the seller’s possession of a predominant share of the market.[ix]

 

Dominant position has been defined by the European Court of Justice in the case of United Brands vs. Commission[x] 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, customers and ultimately of its consumers”.  Similarly, Section 4 (g) of the Philippine Competition Act defines dominant position as a position of economic strength that an entity or entities hold which makes it capable of controlling the relevant market independently from any or a combination of the following: competitors, customers, suppliers, or consumers.

 

Therefore, the factors that are taken into account in determining the dominant market position of an entity is spelled out in Section 27 of the Philippine Competition Act as follows:

 

(a) The share of the entity in the relevant market and whether it is able to fix prices unilaterally or to restrict supply in the relevant market;

(b) The existence of barriers to entry and the elements which could foreseeably alter both said barriers and the supply from competitors;

(c) The existence and power of its competitors;

(d) The possibility of access by its competitors or other entities to its sources of inputs;

(e) The power of its customers to switch to other goods or services;

(f) Its recent conducts; and

(g) Other criteria established by the regulations of this Act.

 

Thus, it is pertinent to look at the company’s share in the relevant market, barriers to entry, power of competitors, access of competitors to inputs, countervailing power of consumers among others.  The law further states that there is a rebuttable presumption of market dominant position if the market share of an entity in the relevant market is at least fifty percent (50%).

 

It bears great emphasis that mere possession of a dominant position is not prohibited.  It is the act of abusing such dominant position that is punishable. Under Section 29 of the Philippine Competition Act, abuse of dominant position is punishable by administrative fines of up to One Hundred Million Pesos (P100,000,000.00) for the first offense and up to Two Hundred Fifty Million Pesos (P250,000,000.00) for the second offense.

 

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ENDNOTES

 

[i] OECD, Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, (1993).

[ii] Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 488 (1992).

[iii] 540 US 398 (2004).

[iv] 377 US 271 (1964).

[v] Deutsche Telekom AG v. Comm’n, Case C-280/08P, 2010 E.C.R. I-9555.

[vi] Eleanor Fox, ‘Monopolization and Abuse of Dominance: Why Europe is Different’  59(1) (The Antitrust Bulletin 2014) 129.

[vii] OECD, Abuse of Dominance and Monopolisation (1996) 8.

[viii] Jefferson Parish Hospital Dist. No.2 v. Hyde466 U. S. 2 (1984).

[ix] Ibid.

[x] Case 27/76 [1978] ECR 207, [1978] 1 CMLR 429).