European competition policy - anti trust policy

Abuses of a Dominant Market Position

What is meant by a “dominant market position”?
A firm holds a dominant position if its economic power enables it to operate on the
market without taking account of the reaction of its competitors or of intermediate or final

In appraising a firm's economic power in the marketplace, the EU Commission takes into
account factors such as:

• The firm’s market share
• Whether there are credible competitors
• Whether the firm has its own distribution network
• Whether it has favourable access to key sources of supply (e.g. raw materials)
• Whether the firm controls access to key technology or intellectual property necessary to
compete in the market

It is important to note that holding a dominant position is not wrong in itself if it is the
result of the firm's own effectiveness.
However, if the firm exploits a dominant position to stifle competition, this is deemed to
be an anti-competitive practice which constitutes abuse.
It is the abuse of the dominant position which is prohibited by Article 82 of the EC Treaty.
The Commission can fine an offending firm up to 10 percent of its turnover

Anti-Competitive Practices

Anti-competitive practices are strategies operated by firms that are deliberately designed
to limit the degree of competition in a market.
Such actions can be taken by one firm in isolation or a number of firms engaged in some
form of explicit or implicit collusion. Where firms are found to be colluding it would
generally (not exclusively) not seen to be in the public interest)
The EU Competition Commission under Mario Monti has been extremely pro-active in
investigating allegations of cartel behaviour among businesses within the single market.
Since 1998 there have been numerous investigations in industries such as chemicals,
banks, airlines, beer, paper production and computer games.

Market share is a zero-sum game!
Competitive processes inevitably involve intense rivalries between firms in which they
attempt - normally in an impersonal way - to injure one another. When one firm cuts the
price of its product, it does so in the knowledge that it will probably take market share
from a competitor. The introduction of new products has the same purpose.
The observation that one firm's conduct has a detrimental effect on another is not enough
to show anti competitive behaviour. It is normally the sign of the normal working out of
the forces of competition. Thus it is not easy to identify anti -competitive practice from
pro competitive behaviour (this is true at a European and a national level).

Arguments in favour of competition (and thus banning anti competitive

The standard monopoly versus competition diagram can be used to show that, given
'similar cost conditions, prices will be lower and output higher in a competitive market
than a monopoly market. There is also likely to be greater choice. This leads to an
increase in consumer surplus and as such, a move away from producer sovereignty
towards consumer sovereignty.

Abnormal (supernormal) profit will be reduced (effectively transferring income from
shareholders to households. A more efficient allocation of resources results since
monopoly involves P>MC at the profit maximising output whereas under competition,
profit margins are reduced and prices paid by consumers are closer to the factor cost of

Anti Competitive Practices can take a number of forms, many of which are subtle (they
are obviously trying not to catch the attention of the competition authorities!). Examples
would include (but not exhaustive):

Predatory pricing financed through cross-subsidization (not all price discrimination is
anti competitive though – much of it is simply a genuine attempt to remain competitive in
a market)

Firms who have market power in more than one market may set prices below cost in one
period in order to drive out rivals and restrict entry. Having done so, it once again raises
price – this is predatory pricing

Vertical restraint in the market:
(i) Exclusive dealing
This occurs where a retailer undertakes to sell only one manufacturer's product and not
the output of a rival firm. These may be supported with long term contracts which bind a
retailer to a supplier and can only be terminated by the retailer at great cost. Distribution
agreements may seek to prevent parallel trade between EU countries (e.g. from
lower-priced to higher priced countries) – this lay at the heart of the decision by the EU to
fine Nintendo in October 2002

Territorial exclusivity
Territorial exclusivity happens when a particular retailer is given sole rights to sell the
products of a manufacturer in a specified area.

Quantity discount
Where retailers receive progressively larger discounts the more of a given
manufacturer's product they sell - this gives them an incentive to push one
manufacturer's products at the expense of another's

A refusal to supply
Where a retailer is forced to stock the complete range of a manufacturer's products or
else he receives none at all
Creation of artificial barriers to entry: Through high advertising, brand proliferation.
Collusive practices: These might include market sharing, price fixing and agreements on
types of goods to be produced.

Practices not deemed to be anti-competitive by the EU

Practices are not prohibited if the respective agreements "contribute to improving the
production or distribution of goods or to promoting technical progress in a market.
• Development of industry standards;
• Research joint-ventures and know-how agreements;