How consistently has the issue of collective dominance been developed under Article 82 and the EC Merger Regulation respectively?

Inhaltsverzeichnis

Content

I. ABSTRACT

II.DEFINITIONOFCOLLECTIVE DOMINANCE

III. THE ISSUE OFCOLLECTIVE DOMINANCEUNDER ART 82 EC
1. THE ITALIAN FLAT GLASS CASE
2. THE POST ITALIAN FLAT GLASS CASE SITUATION

IV. THE ISSUE OFCOLLECTIVEDOMINANCEUNDER THE EC MERGER REGULATION
1. THE NESTLÉ/PERRIER CASE
2. THE KALI-SALZ CASE
3. THE GENCOR/LONROH CASE

V. HAS THERE BEEN A CONSISTENT DEVELOPMENT?

V. CONCLUSION

I. Abstract

Different from other jurisdictions¹, for a long time, the issue ofcollective dominancehasn’t played a role in the view of the Commission and the European Court of Justice. This might have been due to the fact that neither Article 82 EC nor the Merger Regulation explicit mention the issue ofcollective dominance. Nevertheless in the late ’80 this issue was introduced by the Commission and since then it has been the subject of several decisions of the Commission and the ECJ. Unfortunately, until today, the Commission hasn’t published any guidelines on this issue which has lead to miscellaneous uncertainties about the requirements concerningcollective dominance. That’s why it is necessary to analyse the commissions decisions and the judgements of the ECJ concerning this issue in order to find out the requirements which are necessary for an application of this concept. In a second step, I will then compare these requirements in order to find out, if there is a consistent appliance.

II.Definitionofcollective dominance

First of all it is necessary to define what the Commission and the ECJ mean when it comes to the question ofcollective dominance.² The answer to this question is inseparable linked to the existence of what is know as anoligopolisticmarket. An oligopolisticmarketis one which is characterized by the presence of a few suppliers, none of which individually is in a position of market dominance, but each of which is relatively large³.Bishop⁴gives a good description of what is seen ascollective dominancein a market like this:

“Oligopolistic dominance refers to situations in which firms are able to reach an “understanding” so that prices can be increased above the effective competitive level. In many industries, firms recognise that the desirability of a given commercial decision depends to a degree on the commercial decisions taken by other firms in the industry. For example, a firm would like to charge its customers a high price rather then a low one. But charging a high price when rival firms charge low prices will result in low or no sales and therefore lower profits. But, if all firms recognise this, then it is conceivable that they will attempt tacitly to co-ordinate their pricing behaviour so that they all charge high prices. The important point to note is that this understanding is in no way explicit but instead relies on recognising the interaction between themselves and competing firms.”

(emphasis added)

However, this gives only a general paraphrase of collective dominance, but the requirements which are necessary to proof whether undertakings act in the described manner are much more complicated.

III. The issue ofcollective dominanceunder Art 82 EC

Article 82 EC speaks of an abuse of a dominant position byone or more undertakings. It has been clear, that this formulation covers the situation, that one firm occupies a dominant position on the market and it was also seen, that this formulation can cover the situation, presented by cases such asContinental Can⁵and Commercial Solvents⁶, where the dominant position is held by a number of firms which are part of the same corporate group or economic unit. It has however been argued that the reference in Article 82 EC to two or more undertakings has a wider meaning than this, with the result that oligopolistic markets could be controlled. For some time it seemed that Article 82 EC could not be used in this way⁷, however in 1989 the Commission introduced this issue in theItalian Flat GlassCase.

1. TheItalian Flat GlassCase

In this case three producers of⁸ flat glass were accused of maintaining agreed price lists and identical conditions of sale, furthermore, two of these companies had engaged in practices which were designed to achieve full control, not only of the production of glass, but also of its distribution, by excluding from the market independent wholesaler-distributors.

The Commission found that there had been a breach of Article 81, by the producers of the flat glass, and also a breach of Article 82. In relation to the latter, the Commission concluded that the three Italian glass producers held acollective dominant position on the market and that they had abused it, it said: “The undertakings present themselves on the market as a single entity and not as individuals.⁹” The Commission took into account the tightness of the oligopoly, the long-term stability of their market shares, the market degree of interdependence shown by their business decisions and the structural links between them, relating to the fact that they systematically exchanged products between themselves The Court of First Instance (CFI) annulled the Commission’s decision on Article 82, on the ground that there were errors in its reasoning both with respect to the definition of the relevant market and because it had not brought forward the necessary proof of acollectivedominantposition. The CFI clearly did not consider that collective dominance arises solely from the structure of the market; instead it was looking for some type of special relationship between the parties. In the key passage of its judgment the CFI said:

“There is nothing, in principle, to prevent two or more independent economic entities from being, on a specific market, united by economic links that, by virtue of the fact, together they hold a dominant position vis-a- vis the other operators on the same market. This could be the case, for example, where two or more independent undertakings jointly have, through agreements or licences, a technological lead affording them the power to behave to an appreciable extent independently of their competitors, their customers and ultimately of their consumers ¹⁰.”

Unfortunately, the ECJ did not define what it meant witheconomicallinks. Not only because of this gap, did the judgment led to criticism among legal authors¹¹. It was criticised that, if the Commission has to establish that there is an agreement between the collective dominant undertakings which infringes Article 81, the additional finding of collective dominance under Article 82 will have added little. As Wish mentioned:

“The attraction of collective dominance from the Commission’s perspective is that it would provide it with a weapon against non-colluding oligopolists and against oligopolists were explicit collusion cannot be proved, ¹²” (emphasisadded)

2. The Post Italian Flat Glass Case Situation

Though a well-defined position of the ECJ was missing after its judgment in the ItalianFlatGlass case the ECJ has in fact supported the idea of collective dominance. This is apparent from its decision in theIJM¹³case. The Court held that, while one could not automatically conclude that a body, such asIJM, which held a non-exclusive concession in only one part of one Member State occupied a dominant position for the purposes of Article 82, a different assessment must apply where that undertaking belonged to a group of undertakings which collectively occupied a dominant position.

The idea ofcollectivedominancewas also endorsed in theDIP¹⁴case, where the ECJ held that to find such acollectivedominantposition it must be necessary for the undertakings to be linked in such a way that they adopt the same conduct on the market.

The CFI has, in theCompagnie Maritime Belge¹⁵case, subsequently applied the idea of collective dominance to condemn the activities of the members of a liner shipping conference which had sought to eliminate the main competitor. The requisite link between the companies leading them to adopt the same conduct was held to follow from the close relations which shipping companies maintained with each other within such liner conferences, thereby enabling them to act in an unilateral manner. This link and the ability to act unilaterally was reinforced by the existence of a decision-making structure within the liner conference which facilitated the formation and execution of a common response¹⁶.

IV. The issue ofcollectivedominanceunder the EC Merger Regulation

Economists generally agree that there is a relationship between the size, size distribution and number of firms in a market and the likelihood of collusion. Mergers lead to an increase in the size of the merger parties and also reduce the number of firms operating in the relevant market. The structural change implied by the merger may therefore give rise to concerns of oligopolistic dominance if that change creates conditions more favourable to co-ordinated behaviour between the remaining firms. However, changes in the market concentration are but the first step in the analysis. The characteristics of industries differ significantly from each other to such an extent that while tacit co-ordination behaviour may be possib le between firms in one concentrated market, in another equally concentrated market this may not be the case. Hence, formulating general rules which can be applied across all industries is problematic¹⁷

Likewise Article 82 EC the Merger Regulation does not mention explicit the issue of collective dominance, and during the first year of the Regulation, it appeared that the Commission was powerless to prevent mergers that led to high concentration but no outright market leader¹⁸. After the first year of the Re gulation, signs emerged of the Commission’s determination to overcome this oligopoly gap. It has done so by widening the interpretation of dominance in the Article 2(3) compatibility test to encompass “oligopolistic dominance”. This new concept was first introduced into a merger decision inAlcatel/AEG Kabel,¹⁹although that deal was cleared. It was first used to declare a merger incompatible with the Common Market in the Nestlé/Perrierdecision.

1. TheNestlé/Perriercase

In this case, the French market ²⁰for mineral water was subject of the Commissions decision. There were three major suppliers of bottled water in France: Nestlé, Perrier and BSN. Nestlé sought to take over Perrier and also made an agreement with BSN under which it would sell the Volvic source of Perrier to BSN if it acquired control over Perrier.

This case presented a classic oligopoly situation in the French market for bottled mineral water. The conclusion of the Commission that Nestlé and BSN stood to enjoy a position of oligopolistic dominance if Nestlé’s acquisition of Perrier had been allowed to proceed unchallenged rests on a view that, due to the nature of the market and the way the leading players operated within it, Nestlé and BSN would inevitably choose not to compete with one another:

“...any competitive action by one would have a direct and significant impact on the activity of the other supplier and most certainly provoke strong reactions with the result that such actions could considerably harm both suppliers in their profitability without improving their sales volumes. Their reciprocal dependency thus creates a strong common interest and incentive to maximise profits by engaging in anti-competitive parallel behaviour.²¹”

(emphasisadded)

This decision on post- merger behaviour appears to have been based on the degree of price transparency, the maturity of the market, and the view that these features would lead the two market leaders to decide to accommodate rather than compete with one another.

Having satisfied itself that Nestlé and BSN would act together as if a single firm, the Commission simply applied a test of dominance against the jointly dominant firms similar to the one it has applied in cases of single firm dominance. In this case, the factors that differentiated the two leaders from the rest of the market were the differences that existed in size, geographical coverage and the strength of branding as measured in product prices and retailer attitudes.

Thus, the approach to oligopolistic dominance is much the same as that taken to single firm dominance but with one extra step inserted at the beginning of the analysis. That extra step - the critical judgment that the members of the oligopoly will inevitably behave as if they were a single firm - is the key to understanding the approach on oligopolistic dominance²².

2. TheKali-SalzCase

In this case, the proposed ²³merger between Kali & Salz AG and Mitteldeutsche Kali AG was declared compatible with the common market by the Commission even though it creates a combined ma rket share of 98 per cent on the German market of potash. The Commission concluded that a “failing firm defence” applied and so, in this market, the merger did not give rise to any serious concerns.

However, with respect to the remainder of the European Community, the Commission argued that the proposed concentration would create a situation of oligopolistic dominance on the part of the merged entity and the French state-owned producer, SCPA. For this reason, the Commission required K&S to eliminate its links with SCPA, comprising their common participation in an export joint venture and the fact that SCPA was the main distributor of K&S supplies in France, before permitting the merger.

Appeals were lodged against the decision.

The ECJ annulled the Commission’s decision. This judgment is of particular interest because it was for the first time that the ECJ refers to the issue of collective dominance in respect of the Merger Regulation.

The ECJ agreed to the Commission’s view that collective dominant positions do not fall outside the scope of the Regulation²⁴. It added that the Commission must analyse prospectively to see whether the concentration 221 leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings involved in the concentration and one or more undertakings which together in particular because of factors giving rise to a connection between them, are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers, and also of consumers.

However, it was left unclear by the Court, if there must be something like “structural links” between the undertakings in the post- merger situation in order to proof a collective dominant position. Reference to this requirement was seen in the words “in particular”²⁵. The Court, however, quashed the decision on the grounds that the Commission had not adequately established that an oligopolistic dominant position would be created or strengthened.

3. TheGencor/LonrohCase

TheGencor/Lonrohmerger would²⁶ have brought together the platinum activities of Implats (owned by Gencor), and Eastplats/Westplats. This merger would have led to a world market dominance of 80 per cent and therefore was proofed incompatible with the common market by the Commission.

The CFI held, closely following the words of the ECJ in the Kali & Salz case, that “The choice of neutral wording of the kind found in Article 2(3) of the Regulation does not automatically exc lude from its field of application the creation or strengthening of a collective dominant position”²⁷ From the recitals to the Regulation, especially the last part of the 5th recital and Article 5(g) of the EC Treaty, the CFI inferred that the Regulation was intended to apply to all concentrations with a Community dimension that are incompatible with a system of undistorted competition.²⁸

The CFI found that the Commission had based its decision that the concentration would lead to joint dominance on various considerations especially high entry barriers and large market shares. Moreover, the joint venture and its major competitor would have similar cost structures with high over heads. The products were homogenous and their prices transparent. Other suppliers in this market would not be able to baffle the economic power of the duopoly.

The CFI confirmed the Commission’s finding that the likelihood of parallel pricing was increased by the merger, although the industry had already shown an oligopolistic tendency and there were cross-holdings between the parties.

The important point of law is that the CFI implied that there may be joint dominance within the meaning of the Regulation even without structural links.²⁹It rightly said that inItalian Flat Glass:

273 the Court referred to links of a structural nature only by the way of example and did not lay down that such links must exit in order for a finding of collective dominance to be made

AsCaffarraandKühn³⁰conclude, the:

“Major contribution of the judgement is perceived to be its explicit identification of joint dominance with the economic concept of tacit collusion. The Court makes it clear that explicit collusion, as any other instance of abuse which may materialise after the merger, would have to be dealt with under Articles 81 and 82. The focus of merger control should be instead on whether the merger will increase the feasibility of co-ordination, or tacit collusion.

Here is where it gets complicated. Economically no meaningful distinction can be drawn for purposes of prevention between explicit and tacit collusion because what sustains collusion is the same essential mechanism. [...]

[...] if we interpret joint dominance as collusion in the economic sense, what is important in merger control is preventing co-ordination incircumstances where it looks likely that it could be sustained(in economic terms, where co-ordination is “incentive compatible”). In practice this means it is not enough to make a case that after the merger the remaining firms have an incentive to co-ordinate on a higher price. It must also be the case that, in the circumstances of the market, a sustainable mechanism exists by which the threat of lower prices in future will make it rational for them to stick to the higher price, despite the fact that in the short term they have an incentive to undercut.”

This judgment of the CFI has already achieved the status of a standard reference for officials and practitioners alike, it is widely viewed as the “new learning” on the application of oligopoly theory to merger control.

V. Has there been a consistent development?

As we have seen both under Article 82 EC and under the Merger Regulation, the concept of collective dominance was in the beginning contentious. Especially in the early cases under Article 82 it seems that the proof ofeconomic linksbetween the concerned undertakings was a compelling requirement. Since the implementation of the Merger Control the majority of cases in which the issue of collective dominance arose moved from Article 82 to the Regulation. This might have been due to the fact, that there are only a few narrow markets in which this issue really plays a role and in this markets mergers are more likely to produce an oligopolistic situation.

Whether the Court in its early judgments under the Merger Regulation relied to the requirement ofeconomicorstructural links, since its judgment inGencorthis is no longer a necessary element of the concept ofcollective dominance. Does this judgment apply also to Article 82? The judgments requiring links to establish joint dominance under Article 82 are very unsatisfactory, but most of them are from the ECJ. As the CFI held inGencor, its judgment inItalian Flat Glassdid not require links. One has to watch theCompagnie Maritime Belgecase in order to find out the, hopefully, final answer to this question.

V. Conclusion

TheGencorjudgment is a step ahead, although it cannot be the last word on joint dominance. Even in economics the analysis of tacit collusion is ambiguous and difficult to understand, and it will be some time before EU legal rules fully reflect the complexity of the underlying economics.

It would therefore be deserving if the Commission would publish guidelines on the application of the concept of collective dominance.

Bibliography

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¹e.g. US Department of Justice and Federal Trade Commission Horizontal Merger Guidelines, 1992; Bundeskartellamt Checklist for Merger Control Procedure, 1990.

²The CFI used the term „collective dominance“ but „joint dominance“ is sometimes used by the Commission and by commentators, to refer to the same concept.

³Wish R.,CompetitionLaw, 3rd Edition (1993), p 467.

⁴Bishop S.,Power and Responsibility: The ECJ’s Kali-Salz Judgment,1999 ECLR pp 37-39.

⁵Case 6/72,Continental Can Co Inc v Commission,1973ECR 215,1973 CMLR 199.

⁶Case 6, 7/73,ICI and Commercial Solvents v Commission,1974 ECR 223,1974 1 CMLR 309.

⁷See for example the judgment of the ECJ in Case 85/76,Hoffmann-LaRocheandCo.AGv Commission,1979ECR 461,19793 CMLR 211 para 39.

⁸OJ 1989 L 33/44,1990 4 CMLR 535; and the judgment Cases T-68, 77-78/89,Re Italian Flat Glass: SocietàItaliana Vetro v Commission,1992 5 CMLR 302.

⁹see note 8 above at para 79.

¹⁰Cases T-68/89 etc,1992 5 CMLR 302 at para 358.

¹¹Schödermeier M., Collective Dominance Revisited:An Analysis of the EC Commission’s New

Concepts of Oligopoly Control,1990 I ECLR pp 28-34; Wish R.,Competition Law,1993 p 487; Wish R. and Sufrin B.,Oligopolistic Markets and EC Competition Law,199212 YBEL 59; Korah V.,Gencor v. Commission: Collective Dominance,1999 ECLR p 337-341.

¹²Wish R.,CompetitionLaw,1993 p 487.

¹³Case C-393/92,Municipality of Almelo v NV Energiebedrijf Ijsselmij,19994 ECR I-1477.

¹⁴Cases C-140-142/94,DIP SpA v Commune di Bassano del Grappa,1995 ECR I-3257,1996 4 CMLR 157, paras 25-6.

¹⁵Cases T-24-6, and 28/93,Compagnie Maritime Belge Transports SA v Commission,1997 4 CMLR 273, on appeal from Dec. 93/82,Danish Shipowners’Association v Associated Central West Africa Lines Conference (CEWAL),1993 OJ L34/20,1995 5 CMLR 198.

¹⁶Ibid., paras 64-6.

¹⁷Bishop S.,Power and Responsibility: The ECJ’s Kali-Salz Judgment,1999 ECLR p 38.

¹⁸Ridyard D.,Economic Analysis of Single Firm and Oligopolistic Dominance under the EuropeanMerger Regulation,19945 ECLR pp 258; see Ridyard D.,Joint Dominance and the Oligopolistic Blind Spot,19924 ECLR for a discussion of some of these earlier cases, includingRenault/Volvo(IV/M.004),Elf/BC/CEPSA(IV/M.098) andVarta/Bosch.

¹⁹Case,Alcatel/AEG Kabel, IV/M.165 (Dec. 18, 1991).

²⁰Case IV/M190,Re the Concentration between NestléSA and Source Perrier SA,1993 4 CMLR M17.

²¹Ibid., para 122.

²²Ridyard D.,Economic Analysis of Single Firm and Oligopolistic Dominance under the European Merger Regulation,19945 ECLR p 259.

²³Case IV/M.308199 4O.J.,Kali & Salz/MdK/Treuhand; on appeal in Case C-68/94 and 30/95, French Republic v Commission,1998 4 CMLR 829-953; see also case IV/M.03581993, Pilkington/SIV; for a detailed analysis of the Commission’s decision, see Briones J.,Oligopolistic Dominance: Is there a Common Approach in Different Jurisdictions? A Review of Decisions Adopted by the Commission under the Merger Regulation,19956 ECLR pp 334-347.

²⁴Ibid., paras 165-178.

²⁵Korah V.,Gencor v. Commission : Collective Dominance, 1999 ECLR p 337.

²⁶Case T-102/96,Gencor/Lonrho v Commission,19994 CMLR 971.

²⁷Ibid., para 126.

²⁸Ibid., paras 148-151.

²⁹Ibid., paras 273-284.

³⁰Caffarra C. and Kühn K.-U.,Joint Dominance: The CFI Judgment on Gencor/Lonrho,1999 7 ECLR p 356.