European Competition Law 2009-2010

Question 1

1. Art. 82 prohibits the abuse of dominant position by undertakings in the common market. Assessment of whether an undertaking abused its dominant position is a three step analysis. First, there should be an undertaking. Second of all, we have to find out if the undertaking is dominant in the relevant market and thirdly, whether it abused this position.

As far as the information provided by the question, Pronail can be considered as an undertaking since it is an entity engaged in an economic activity.

To find out whether Pronail is dominant, we have to assess the relevant market. To do this we have to determine the product market and geographical market.

According to the Hoffman-La Roche case, the product market covers goods which are identical or regarded by customers as similar in relation to use, quality or price. In our case, according to the given facts, there are two product markets. One of them is the market for large nails, the other is for the small nails.

Pursuant to the Commission Notice 1997 OJ C 372, the geographical market “comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the condititions of competition are sufficiently homogenous and which can be distinguished from neighbouring areas beacause the conditions of competition are appreciably different in those areas’..”. In this case I assume the geographical market as the European common since there is no information contrary that these transactions does not effect European common market.

Once we determine the product and geographical market, we have to assess wheteher Pronail is dominant in the relevant market. Although for the firt question we only need to assess the dominance for large nail market, I will provide information for the small nail market too. United Brands v Commission case defined dominant position as: “a position of economoic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitiors, customers and ultimately of consumers”. Accordingly, dominant position can be determined by looking into several indicators such as market share of Pronail, market share of its competitors, control of production and distribution and conduct of Pronail. Pronail has 45% in the large nail market and 40% in the small nail market. Although having more than 50% market share is a strong indication for being dominant , having less than that does not automatically makes Pronail not dominant. As mentioned before we have to look at other indicators. For the large nail market, although Pronail holds 45% of the market, we can say that it is dominant. In the United Brands v Commission case, United Brands was considered dominant holding only 40-45% market share since this percentage was high compared to the percantages that its competitors are holding. It is the same case for Pronail. Because Pronail’s competitors hold small percantage compared to Pronail, we can conclude that it is dominant. However, for the small nail market, it does not hold dominant position since has only 40% of the market which is less than its competitor that has 41% market share. For this question we are going to use only large nail market as the relevant market.

After determining that Pronail is dominant in the relevant market, we need to analyze whether it abused this position. According to the art.82 of the EC Treaty, an undertaking abuses its dominant position, for example, by imposing unfair buying or selling prices or unfair trading conditions; limiting markets and production; or using different conditions for similar transactions.

Pronail’s offer that consumer A buys 90% of its requirement for large nails from Pronail is considered to be a conditional rebate. Conditional rebates are rebates that are granted to customers in order to reward them for a particular form of purchasing behaviour. In our case if A buys 90% of its requirement for large nails from Pronail would give a rebate of 3.5 cents. Conditional rebates offerred by dominant undertakings can have foreclosure effects. Specifically, if Pronail sets the threshold above the level that the consumer A would buy from Pronail in the absence of any loyalty enhancing effect or rebate, this constitutes a foreclosure. Consumer A would not prefer to switch to another supplier for the remaining %10 of the products in order to be loyal and not loose this rebate. In this case A would buy more than it was planning to buy from Pronail.

Conditional rebates are against art.82 of the EC Treaty. Commission uses a per se approach stemming from the caselaw when assessing conditional rebates. We can see this in the recent decision of Intel too. There the Commission stated as it did in the Hoffman-La Roche case that: “an undertaking which is in a dominant position on a market and ties purchasers .. by an obligation or promise on their part to obtain all or most of their requirements exclusively from the said undertaking abuses its dominant position within the meaning of article 82 EC, whether the obligation in question is stipulated without further qualification or whether it is undertaken in consideration of the grant of a rebate.”

Therefore offering conditional rebates infringes with art.82 and therefore is incompatible with the common market.

2. Pronail is not dominant in the small nail market. There are other big players in the market such as Nailox wih 41% and Nailtop 19%. Because Pronail is not dominant on the market, this action can not infringe art. 82 of the EC Treaty.

3. Pronail offers costumer C a package of large and small nails which would cost 13 cents. This is a market strategy called bundling. It refers to situations where a package of two or more goods is offered. To be more specific, this is called mixed bundling in which both products are available on the market and the bundle is sold at a discount to the sum of the prices when the products are sold separately. Normally large nail costs 10 cents and small one costs 8 cents which is 5 cents more when sold as a bundle. Pronail’s offer may infringe art. 82 of the EC Treaty as abuse of dominant position.

As mentioned in the first question Pronail is dominant in the Large nails market and not in the small nails market. Pursuant to the DG Competition Discussion Paper, in case of bundling, the undertaking needs to be dominant only in one of the markets. Therefore Pronail’s being dominant in the large nails market is sufficient to consider it dominant for our purposes.

Abuse of dominant position can be exploitative and exclusionary abuses. Exploitative abuse referes to the dominant company’s conduct that exploits the customer by unfair prices whereby the company increase its margin of profit from its costs of producing the goods. Exclusionary abuse refers to the conduct by a dominant company that leads to an exclusion of competitor in the market. In our case, Pronail does not exploit the customers by the unfair prices. Because both of the products are available to be purchased seperately, the consumers have option to buy them seperately.

The question whether Pronail commits exclusionary abuse needs further anlysis. In case of mixed bundling, competitors may be excluded if the discount is so large that the other competitors can not compete against the discounted bundle. Commission proposes a test to assess the exclusionary effect of the mixed bundling. According to the DG Competition Discussion Paper, save the exceptions, we can conclude exclusionary conduct by the dominant company if the incremental price that customers pay for each of the dominant company’s products in the bundle covers the incremental cost of including this product in the bundle. Incremental price of a product is the difference between the bundle price and the stand-alone price of the other product. For the large nail, it is 13-8=5. For the small nail it is 13-10=3. LRIC for producing one large nail is 6 cents and it is 4 cents for one small nail. Since incremental price of large nail and small nails are each 1 cent more than their incremental costs, we can say that incremental price that costumer pays for one product does not cover the incremental costs of including this product in the bundle. Therefore we can conclude that Pronail’s offering costumer C a bundled that costs 13 cents breaches art. 82 of the EC Treaty.

As far as the scarce of the given information, we can not invoke efficiency arguments, therefore can not justify this bundle. However, if Pronail increases the price of its bundle to 14 cents it will cover the incremental cost of each product, therefore would pass the test.

Question 2

1. This question asks us to assess of their plans in the Borduria market in light of the EU Competition Law.

Alfa owns LittleB as a subsidiary in Borduria. The market share for Little B is 15% of the Borduria widget market. Alfa is thinking of buy Diana, which has 55% of widgets market share in Borduria.

In case of it buying Diana there will be a concentration in the market. The Commission deals with the concentrations that have a community dimension. Community dimension test can be used to find out if there is concentration in the market. Pursuant to this test, if the combined aggragate worldwide turnover of the undertakings concerned is more than 5000 million Euro and aggregate Community turnover of each undertaking is more than 250 million euro, there is a community dimension. If we apply this test to our question we can see that concentration has community dimension.

If a concentration meets the community dimension threshold, it is of exclusive competence of the Commission under ECMR. Now that we found community dimension, we have to check whether this will create any problems with the EC competition law. In order to find this, we have to check the concentration levels of the undertakings in the Bordoria market. HHI index is used to measure the concentration level. According to this index, we have to sum the squares of the market shares of each undertakings in the market. After the purchase of Diana, the concentration will be 5800 and the market share will be 55%(Diana) + 15%(LittleB)= 70%.

Therefore, this concentration creates a problem of concentration and will not be allowed according to the Article 2(3) of the Merger Regulation.

In addition to Bordoria market, when Alfa buys Diana, this may also create a problem for the Arcadia market too. The total market for Alfa will reach 50% and Alfa will be dominant in the Arcadia market.

2. In this case there will be a meeting between Minerva’s and Alfa’s directors to discuss the Alfa’s potential in the Valhalla market. This may create a problem because the Grand Widget Union meetings infringes EU Competition Law.

Grand Widget Union meetings especially about the pricing practices of the widget operators and their respective areas of influence on the territory of Valhalla infringes Art. 81(1) of the EC Treaty.

Question 3

Vertical restraints can be produce pro- or anticompetitive. It is argued that one of the pro-competitive motivation that enhances efficiency is “free riding”. In the case Consten and Grundig v. Commission, the undertakings signed a dealership agreement. With this agreement Consten was required to purchase a certain amount of Grundig’s exports into France. In addition Consten undertook not to compete by selling competitive products outside its contract area. The court decided in this case that market fragmentation was more important than the protection of competition.

Consten and Grundig involves intra-brand competition. Article 81(1) applies to both inter-brand and intra-brand competititon. Inter-brand competition is the competition between different brands, such as, competition between Toyota and Ford cars. Intra-brand competition is the competition between goods of the same brand, such competition between different retailers of Toyota cars. There are some reasons that competition policy treats inter-brand and intra-brand agreements differently. Interbrand restraints seldom raise concerns. One of them is that, intra-brand competition is considered less harmful than inter-brand competition in terms of the effects they have on consumers. For example if there is no inter-brand competition consumer would have to buy the product from a higher price, if the two competing firms fix a price. However in case of restriction of intra-brand competition, consumers still have the chance to buy the product from a different brand.

The Commission believes that parallel trade is very important for market integration because it promotes cross-border competition. However in recent cases Comission found in favor of the actions that restricts parallel trade by the pharmaceutical industry.

In Bayer case there was a quota system aimed at reducing parallel export was not considered as an “agreement” by the court in that, there was no explicit ban by the producer and wholesalers had attempted in all possible ways to circumvent the quota system and attain goods for parallel exports. ECJ argued that “the mere fact that a measure adopted by a manufacturer, which has the object or effect of restricting competition, falls within the context of continuous business relations between the manufacturer and its wholesalers is not sufficient for a finding that such an agreement exists”

This decision was very important for pharmaceutical industry, because it showed that even if quota systems were successful to reduce parallel trade, they were not considered per se illegal.