We are all delighted when firms compete for our business - not only by being efficient and customer friendly, but also by offering volume discounts ("three for the price of two", "buy one, get one free") and loyalty discounts such as as airmiles, reward cards, Nectar cards and Clubcards.
But there comes a point when such behaviour becomes anti-competitive. A large company may, for instance, temporarily reduce certain prices so as to squeeze a smaller rival out of business. Or it may refuse to supply a customer who threatens to start buying part of their supplies from a smaller competitor. Such behaviour is, in law, abuse of a dominant position and can lead to the imposition of large fines of up to 10% of turnover in all of the relevant years.
The most commonly attacked forms of abuse are listed below. They can be divided into two broad groups. Exploitative abuse enables the firm to increase its profits by exploiting its market power; a step along the road, if you like, towards having monopoly power. Exclusionary abuse is aimed at excluding or removing competitors from the market.
And it is hardly a new phenomenon. Martin Luther took a very hard line:-
Limiting production - perhaps by failing to expand or invest, so increasing prices and profits but disadvantaging customers who cannot easily move elsewhere.
Restriction of supply to distributors - again with a view to maintaining high prices and profits. But this is in practice often allowed. It is still possible for the manufacturers of certain goods to 'recommend' retail prices, and this can get pretty close to price-fixing. And the prices of luxury goods can be kept artificially high by restricting their availability. Very few shops are, for instance, allowed to sell Hermes scarves or Rolex watches. This restriction of competition is allowed on 'public interest' grounds, for it is felt that the public would be less well served if they were not allowed to spend money on luxury goods so as to show, in effect, how wealthy they are.
Excessive pricing - One obvious (but hard to define) symptom of abuse of dominant position would be surprisingly high prices (and profits). Interestingly, the European Court (the CJEU) found that such pricing could be identified if prices in one country (in which the company was dominant) were much higher than in another (in which it was not). In more detail:
- the Court recognised that there is not a single method to determine whether prices are unfair.
- However a good method is to compare rates charged in neighbouring countries if the Member States taken into account present similar features (i.e.: consumption habits, economy and citizen welfare).
- Furthermore, the Court combined the above described “geographic comparison” among neighbouring countries with a wider comparison among all the Member States by using a purchasing power parity index (“PPP”) index which helps overcoming the differences between countries with heterogeneous economic conditions.
- The Court explained that in order to have an abuse of dominant position, the rates charged by a dominant undertaking is to be regarded as “appreciably higher” than those charged in another Member State. On this notion, although there is no minimum threshold above which a rate must be regarded as “appreciably higher”, the difference between prices can be qualified as “appreciable” if it is both significant and persistent. Therefore, nor temporary, neither episodic. However, filling these definitions will be a matter for the national courts.
Price discrimination - offering price reductions and volume discounts to those customers who may be tempted to leave you for a competitor. But individual banks, for instance, are not regarded as dominant in their market and so are not prohibited from offering good interest rates to new customers, whilst switching established customers to much lower rates.
Tying - such as tying one product to the sale of another, being restrictive of consumer choice and depriving competitors of outlets. This led the European Commission to fine Microsoft € 497 million for including its Windows Media Player within the Microsoft Windows platform. And there was big USA 'tying' investigation in the 1990s when Microsoft was found guilty of illegally forcing PC vendors to bundle its Internet Explorer browser, so shutting out Netscape.
Refusal to supply a facility which is essential for all businesses attempting to compete - The most obvious essential facilities are in the transport industry: docks, bus stations & airports. But the Competition Appeal Tribunal held that privately built and owned crematorium was not an essential facility even though its exclusive use by its funeral director-owner meant that no other funeral director firm could attract business in that particular town.
Full line forcing - the retailer is forced to stock the whole of a manufacturer's range of products, thus leaving little or no room for competitors' products.
Freezer and fridge exclusivity - Birds Eye Walls were prohibited from loaning freezers to small shops in the UK on condition that they did not use them to sell ice creams made by its competitors, Mars. Similarly the EU required Coca-Cola to allow 20% of its fridge space to stock drinks made by competitors such as Pepsi.
Predation (as in preying on a victim). This behaviour includes predatory pricing - the practice of dropping prices of a product so much that smaller competitors cannot cover their costs and fall out of business - and other predatory behaviour - e.g. running new bus services at frequent intervals so as to force a new competitor out of the market.
Abuse of dominance investigations are carried out in the UK by the Consumers and Markets Authority (CMA) under Chapter II of the 1998 Competition Act 1998, which closely mirrors what is now Article 102 of the Treaty on the Functioning of the European Union (TFEU). Appeals from CMA decisions are to the Competition Appeal Tribunal.
The problem is that dominance is hard to prove, and abuse of dominance even harder, given that much "abuse" is regarded as feisty competition when carried out by smaller firms. Indeed, executives of larger companies under such investigation often complain that they are being penalised for being successful. Abuse investigations are also always very hard fought, partly because the fines can be so high and also because of the word abuse and the associated accusation of wrongdoing. The European Commission has had some luck under Article 102 (and its predecessor legislation) with victories over Microsoft, for instance - see "tying" above. But successful UK Chapter II investigations are few and far between. Market Studies and Market Investigations,which do not require the CMA to prove wrongdoing, have been much more successful.
The OFT did however successfully show that Cardiff Buses had abused their dominant position in the Cardiff bus market by setting up new services when threatened by '2 Travel' - a new entrant into the market. 2 Travel subsequently took a private action* in the courts against Cardiff Bus, suing successfully for both ordinary damages and exemplary damages. The Competition Appeal Tribunal, in awarding both sets of damages, commented that "Cardiff Bus's conduct has been outrageous" and "There is something inherently repugnant in a service being commenced by a dominant undertaking for the sole reason of excluding another."
Another OFT success led to Reckitt Benckiser being fined £10m after it withdrew Gaviscon Original Liquid from the National Health Service prescription list after its patent had expired and before a generic name could be assigned to the medicine. They did this because, if UK doctors search for a branded drug, their software gives the generic name if there is one, so allowing pharmacists to dispense the cheaper drug to save the NHS money. This choice provides for strong price competition between pharmaceutical suppliers and can result in considerable savings to the NHS. By withdrawing NHS packs of Gaviscon Original from the prescription list after the patent had expired but before it was given a generic name, doctors were instead forced to prescribe its alternative product, Gaviscon Advance Liquid, which cost much more.
It is also worth noting that:
- The NHS subsequently took a private action* against Reckitt Benckiser, claiming damages of £90m. This was settled out of court, presumably for a lower figure.
- The company's behaviour was originally disclosed by an anonymous whistleblower who contacted the BBC's Newsnight programme.
- The company said that it was 'shocked' by the allegations, adding that it was 'a responsible company'.
- The company paid its CEO £90m in 2009, which suggests that it will have been little troubled by the much smaller OFT fine and NHS damages.
- The company was subsequently accused of misleading consumers - at least in Australia - in the marketing of Nurofen Back Pain, Nurofen Period Pain, Nurofen Migraine Pain and Nurofen Tension Headache, all of which cost twice as much as its standard Nurofen product, although their active ingredient - nurofen lysine - works more quickly than Nurofen's simple ibuprofen. An Australian court found that, although each product was formulated slightly differently, none of them were any more effective at treating the type of pain described on its packaging than any of the other Nurofen specific pain products. The court accordingly, in December 2015, ordered products in the Nurofen pain relief range off the shelves in that country. (Nurofen, by the way, itself costs a lot more that the generic and equally effective versions of the same ibuprofen drug.)
*Private actions may be brought to claim compensation for losses caused both by abuse of dominant position and by cartels. Further information about private actions may be found here.
The CMA has also has some success in other pharmaceutical 'price gouging' cases against companies such as Pfizer. There is a current case against a Concordia Healthcare which bought rights to a newly debranded drug and increased its price over time from £4.46 to £258.00. (Debranding takes drugs into unregulated pricing regimes where competition is supposed to act as a brake on prices. But if competition does not emerge then the sole supplier becomes a monopolist.)
Significant European Cases
The European Commission announced in November 2010 that they were investigating possible abuse of dominant position by Google's search engine. The investigation aimed to determine whether the firm's method of generating unpaid results adversely affects the ranking of other firms, specifically those providing so-called vertical search services such as sites that offer price comparison. A UK company called Foundem filed the complaint, amongst others, in February 2010, alleging that Google's search algorithms "remove legitimate sites from [its] natural search results, irrespective of relevance". It also says that the firm promotes its own services over those offered by competitors:- "Google is exploiting its dominance of search in ways that stifle innovation, suppress competition, and erode consumer choice". Google, however, argued that there are good reasons why Foundem's site is ranked poorly. For example, it said, Foundem "duplicates 79% of its website content from other sites." The case was still unresolved in 2013 when Fairsearch Europe increased the pressure on Google by complaining that it was abusing its dominant position by providing its Android operating system for free on mobile phones:- an echo of earlier complaints in both Europe and the US that Microsoft had abused its dominant position by bundling Media Player and Internet Explorer with its Windows PC operating systems.
The Commission announced in June 2017 that it was fining Google 2.4bn euros ($2.7bn; £2.1bn) as "the company had abused its power by promoting its own shopping comparison service at the top of search results". I doubt that Google cared very much. The abuse had, after all, been going on for at least 7 years, and Google's parent company Alphabet currently had more than $172bn of assets. I doubt, too, that Google were too concerned that Commissioner Margrethe Vestager then encouraged companies that had been hurt by Google's behaviour to use the Commission's report as a basis for claiming damages via private actions.
The case for Google was nicely summarised on the Chillin'Competition blog as follows:
Google provides a free search service to consumers and it monetizes this service via advertisements. Today’s decision states that Google cannot favor its own product ads – the very same ones that make its services possible - over those of competitors. This is remarkable and wholly unprecedented. To illustrate what this means, a useful analogy may be to think about a newspaper (a business models that is also funded via ads). What the Commission is doing is the equivalent of asking this newspaper to carry/publish the advertising service of competing newspapers and in equal conditions whatever that means (same placement, length or size, possibly even almost for free) and without getting the revenue. Another valid analogy is that of a supermarket obliged not to favor its own products, even if it is not the only supermarket around. The implications for vertically integrated companies in virtually every industry are potentially enormous.
But this seems to me to be over-egging the argument. Lots of perfectly proper competitive behaviour becomes improper and unacceptable when a company becomes dominant. So a newspaper could be accused of misbehaving if (a) it favours its owners' products when displaying advertisements, and (b) we all read that newspaper and read hardly any others. It is no doubt very annoying to be told that you cannot exploit your dominance in one area in order to gain advantage in another, but the alternatives are worse - for consumers at least.
But Google's response was interesting. It decided against going back to the old system and including merchants without charge and listing them by lowest price. Nor will it fulfil its equal treatment obligation by listing all comparison shopping sites in its general results in order of quality or relevance, as it does for non-commercial queries. Instead, Google has told the commission that it will create a standalone unit for its shopping service and force rivals to bid against that unit (and each other) for ads shown at the top of Google’s search results page. This could raise costs and prices., but maybe this is worthwhile if it deters future abuse?
Here is an interesting footnote to this case:- Google had previously won a legal battle in the UK with a small company called Streetmap - a pioneer in online mapping whose service was crushed when Google put its own Google Maps above Streetmap in its search engine results. The Competition Appeals Tribunal ruled that, although Google held a dominant position, it had not committed a abuse.
Other concerns about the behaviour of Google and the other Technology Giants are discussed here.
The European Court of Justice in 2014 confirmed a 2007 European Commission decision that MasterCard's interchange fees were anti-competitive. This led to a collective claim against MasterCard to be launched in the UK on behalf of all consumers.
And the Commission began a second assault on Google in 2016 when it accused it of abusing the dominant position of its Android operating system, for instance by placing requirements on mobile (cellphone) manufacturers to pre-install some Google products. This is a similar accusation to that which led to Microsoft being fined many hundreds of millions of Euros for tying the installation of Microsoft operating systems to the installation of Internet Explorer and Windows Media Player.
Ominously (for consumers) the New York Times reported in April 2016 that two tech giants 'had agreed to withdraw complaints against each other with regulators around the world'. But competition regulators do not need to receive complaints before they take action, so hopefully this agreement will have less impact than the two companies might hope.
The European Commission announced in April 2015 that it was investigating Gazprom for abusing its dominant position in Eastern Europe by building artificial barriers which reduced its customers' ability to resell their gas to others.
It was reported in early 2016 that professional speed skater Claudia Pechstein had successfully persuaded the German courts that, since the German skating organisation controlled the market for speed skating events, its use of arbitration clauses binding athletes to use the International Court of Arbitration for Sport constituted an abuse of a dominant position under German antitrust law. (The case arose because the anti-doping authorities had found what they believed were abnormal levels of reticulocytes, or immature red blood cells, in Claudia's blood, often an indicator of doping. She says that the irregularity was the result of a congenital blood disorder.) The German court said it found a structural imbalance within the sports court that favored sports governing bodies over athletes. The imbalance, according to the court, arose from the composition of the Council whose 20 members are nominated primarily by international sporting organisations, and not by athletes. The decision is being appealed.