Abuse of Dominant Power in Relevant Market Under Competition Law

"Competition is not only the basis of protection to the consumer but is the incentive to progress."  -Herbert Hoover

Competition law have been one of the most underdeveloped law in India. The need for competition law came to the fore when MRTP Act revealed its inadequacy. In the matter of past two decades of economic laws and their evolution in India, competition laws have grown at a phenomenal rate along with the development of various doctrines which are of the utmost importance when it comes to consumer welfare and market equilibrium. Competition laws are evolving in each and every jurisdiction around the globe are they are being contemplated as per the economic activities of that country or economic system. Apart from the geographical development, competition law governs many economic activities that were prior considered as natural monopolies or preserve of the state.

One such doctrines in the interest of welfare of the customer is the doctrine of abuse of dominant power in the relevant market, The Act under section 4 defines dominant position (dominance) in terms of aposition of strength enjoyed by an enterprise, in the relevant market in India, which enables it to:

• operate independently of the competitive forces prevailingin the relevant market; or
• affect its competitors or consumers or the relevant marketin its favour.

This doctrine enshrined in the Competition Act, 2002 is broadly fashioned on the European Competition Law on abuse of dominance inculcated under article 102 of Treaty on the Functioning of the European Union (TEFU).

The term ‘relevant market’ has been defined as “the market that may bedetermined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets”. The purpose served by delineating a relevant market is to define the scope within which the position of an enterprise is to be tested for dominance and abuse thereof. The 'relevant market' is defined in terms of 'product' and 'geography', that is to say, the relevant market identifies the particular product/service or class of products produced or services rendered by an enterprise(s) in a given geographic area.

Product Market and Geographic Market

The broad and vast category of relevant market can be further categorised into two facets, one is product market and the other one is geographical market.

The first facet has been defined under sub-section (t) of section 2 in the terms of sustainability. It is the matter of smallest set of products (both goods and services) which are substitutable among themselves, given a smallbut significant non-transitory increase in price (SSNIP). The marketfor cars, for example, may consist of separate ‘relevant product markets’ for small cars, mid-size cars, luxury cars etc. as these arenot substitutable for each other on a small change in price.

The other facet of relevant market is defined under sub-section (s) of section 2 in terms of “the areain which the conditions of competition for supply of goods orprovision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas”.

Once the determination of the relevant market is done, then the next step of the ladder is the determination of the fact whether abuse of dominance is taking place or not. As per the normative definition of Dominance is that a dominant enterprise is one that has the power to disregard market forces, that is, competitors, customers and others and to take unilateral decisions. Dominant position in the relevant market enables operation that is independent from the prevailing forces. The enterprise is in a position to affect its competitors, consumers or the relevant market in its favour and therefore can appreciably affect the relevant market.

There are three crucial steps to establish whether an enterprise holds a dominant position and whether it is abusing it-

• Defining the relevant market.
• Assessing the market strength to ascertain whether the enterprise holds significant power.
• Consider whether the conduct of the undertaking amounts to abuse.

To ascertain whether or not an enterprise holds a dominant position, the relevant market should be specified since dominance does not occur in an abstract market. A dominant position is always in reference to a relevant product and relevant geographical markets.

• Market Share- An enterprise holding high market shares does not necessarily enjoy dominant position. Different parameters are employed to measure market share depending upon the nature of sector and the issue under investigation. As the Raghavan Committee reported, “a firm with a low market share of just 20 per cent with the remaining 80 per cent diffusedly held by a large number of competitors, may be in a position to abuse its dominance, while a firm with say 60 per cent market share with the remaining 40 per cent held by a competitor may not be in a position to abuse its dominance because of the key rivalry in the market. Specifying a threshold or an arithmetical figure for defining dominance may either allow real offenders to escape or result in unnecessary litigation. Hence, in a dynamic changing economic environment, a static arithmetical figure to define “dominance” will be an “aberration.” The Competition Act, 2002, therefore does not state a percentage of market shares as the measure of dominance. However, a high market share usually indicates limited ability of the customer to shift to other undertakings.
• Size and Importance of Competitors- Not only the size and value of the enterprise but also the size and importance of its competitors are crucial when determining dominance. The largest firm’s market share should be evaluated relative to its competitors; the smaller the shares of the competitors, the largest firm is more likely to have dominance.
• Dependence of Consumers on the Enterprise- Customers have a bargaining power and influence the pricing and conditions of the market. If in the relevant market, the dependence of consumers on the enterprise is high for example a specific medicine that is non-substitutable; the enterprise providing that medicine will be determined as dominant. Likewise, a consumer of electricity in India, at present, does not have a choice of supplier.
• Entry Barriers – Barriers to entry, exit or expansion and durability to market power have been identified as very important factors in the assessment of dominance. If entry barriers faced by the rivals are low, the undertaking which have high market share may not be able to continue with significant market power for long. The barriers could be structural, regulatory or strategic one. Common barriers to entry a specific market includes legal patents as well as first mover strategic advantages.
• Countervailing Buying Power – In a market, the buyer also has bargaining power which affects the price of a product. A strong buyer affects the dominance of an enterprise just as much as a strong competitor.
• Market Structure and Size- Market structure can be characterised by a sole supplier of goods/services either on stand-alone basis or by virtue of common ownership.

Abuse of dominance

Dominance is not considered bad per se but its abuse is. Abuse is stated to occur when an enterprise or a group of enterprises uses its dominant position in the relevant market in an exclusionary or/and an exploitative manner. The Act gives an exhaustive list of practices that shall constitute abuse of dominant position and, therefore, are prohibited. Such practices shall constitute abuse only when adopted by an enterprise enjoying dominant position in the relevant market in India.

A few types of abuse of dominant position are analysed as under-

i) Predatory Pricing- Section 4(b) of the Act defines it as “the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.”

ii) Refusal to supply- This leads to a serious interference with the independence of small and medium sized firms and their commercial relations. This has a heavy negative impact on the state of fair competition in the relevant market.

iii) Limiting Supply- A perfect example of this is the diamond market. Even though large quantities of them are in storage, only a small quantity is polished and made available to the buyers, resulting in its high price.

iv) Barriers to entry or denial of market assess- Barriers to entry includes patent as well as strategic first mover advantages.

v) A group of colluding suppliers appreciably affecting the relevant market.

The European Union Microsoft Competition case can be used to further illustrate the effect of the abuse of dominant position on competition in the market. In 2004, Microsoft abused its dominant position in the market of computer operating systems. The company froze out the competing companies by not allowing their software to run on Microsoft operating systems. Microsoft at this time had almost complete dominance over the desktop operating system. This freezing out other software would have resulted in the people using Microsoft OS being left with limited options and non-dynamic products. The users would be left with no feasible option but to use only Microsoft software. The European Commission’s judgement stated that Microsoft cannot regulate the market by imposing this products and services on people thus restoring a merit driven competition in the software market. The users not therefore get to pick from more innovative and dynamic software at more competitive prices.

While “perfect competition” is a not a wholly realistic model but a theoretical one, it shows the optimal state for all relevant markets. A large number of buyers as well as suppliers freely entering and exiting the market without having a serious impact on the relevant market as independent bargainers have many benefits. The enterprises will be continually striving for their client’s as well as prospective client’s business.

Conclusion

When an enterprise begins to abuse its dominant position, the relevant market is inevitably impacted negatively in the long run. Not only the consumers, but even the competitors suffer setbacks that disincentives them from investing in the market.