Remedies in EC and Italian Competition Law

Remedies in EC and Italian Competition Law Seminars at the Chair of Civil II School of Law Roma 3 Univ. March April 2010 Seminar 2 Relevant Product and Geographic Market Definition SSNIP Test Market Power Pierluigi Congedo King s College London 1

Seminar 2 OUTLINE Powerpoint on the website of Rome 3 univ. http://www.giur.uniroma3.it/materiale/scarica/civileii.html Market definition product market and geographic market Undertaking definition SSNIP Test Cases: Continental Can C-6/72 and United Brand C- 27/76 Introduction to Market Power (Hoffmann La Roche) An important Italian case on market definition: Corte di Cassazione 13 February 2009, no. 3638 abuse of a dominant position by ENEL 2

Market definition and Market Power Two fundamental concepts of EC Competition Law, before tackling in depth Section 101 and 102 TFEU (Sect. 2 and 3 of Italian Competition Act 287/90) and Merger regulation(s) What does mean Market Definition? Memorable pages in classical literature: Adam Smith (the Wealth of Nations); Stuart Mill; Jeremey Bentham in recent times, Seminars of Luigi Einaudi in Switzerland (market place, where supply-side meets the demand-side) any manual of Political Economics provides definitions 3

Bishop, Simon and M. Darcey (1995): A Relevant Market Is Something Worth Monopolising. Relevant market defines the market in which one or more goods compete. Therefore, the Relevant market defines whether two or more products can be considered substitute goods and whether they constitute a particular and separate market for competition analysis Definition by the European Commission: product and geographic markets 4

Product and geographic markets The relevant market combines the product market and the geographic market, defined as follows: (i) A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products' characteristics, their prices and their intended use; (ii) A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous 5

The subtitutability Test (or monopolization Test ) The SSNIP Test : Small but Significant non-transitory Increase of Price The Relevant market contains all those substitute products and regions which provide a significant competitive constraint on the products and regions of interest: therefore, IF a small but significant (5/10%) non-transitory increase of price pushes, encourage the consumer (or the supplier) to look for (or to provide) a substitute, all those goods (or services) which are easily substitutable, on the demand and supply side, belong to the same market [Exception: the Cellophane Fallacy ] 6

Notice of the European Commission C372/5 [1997] Source: website of the European Commission DG COMP (Directorate General of Competition) http://eurlex.europa.eu/lexuriserv/lexuriserv.do?uri=ce LEX:31997Y1209(01):EN:HTML 7

Paragraph 2 of the notice on Market Definition Market definition is a tool to identify and define the boundaries of competition between firms. It serves to establish the framework within which competition policy is applied by the Commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved (2) face. The objective of defining a market in both its product and geographic dimension is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and of preventing them from behaving independently of effective competitive pressure. It is from this perspective that the market definition makes it possible inter alia to calculate market shares that would convey meaningful information regarding market power for the purposes of assessing dominance or for the purposes of applying Article 85. [now 101 TFUE] 8

Definition of Product Market Product market must be defined having in mind not only substitutability of goods on the demand side, but also on the supply side (same can be said for the geographic market) Para 15. of Commission Notice on relevant market: 15. The assessment of demand substitution entails a determination of the range of products which are viewed as substitutes by the consumer. One way of making this determination can be viewed as a speculative experiment, postulating a hypothetical small, lasting change in relative prices and evaluating the likely reactions of customers to that increase. The exercise of market definition focuses on prices for operational and practical purposes, and more precisely on demand substitution arising from small, permanent changes in relative prices. This concept can provide clear indications as to the evidence that is relevant in defining markets. 9

Para.17 of the Notice on Market Definition 17. The question to be answered is whether the parties' customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered. If substitution were enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market. This would be done until the set of products and geographical areas is such that small, permanent increases in relative prices would be profitable. The equivalent analysis is applicable in cases concerning the concentraiton of buying power, where the starting point would then be the supplier and the price test serves to identify the alternative distribution channels or outlets for the supplier's products. In the application of these principles, careful account should be taken of certain particular situations as described within paragraphs 56 and 58. 10

A practical example in para. 18 of the Notice: 18. A practical example of this test can be provided by its application to a merger of, for instance, soft-drink bottlers. An issue to examine in such a case would be to decide whether different flavours of soft drinks belong to the same market. In practice, the question to address would be whether consumers of flavour A would switch to other flavours when confronted with a permanent price increase of 5 % to 10 % for flavour A. If a sufficient number of consumers would switch to, say, flavour B, to such an extent that the price increase for flavour A would not be profitable owing to the resulting loss of sales, then the market would comprise at least flavours A and B. The process would have to be extended in addition to other available flavours until a set of products is identified for which a price rise would not induce a sufficient 11 substitution in demand.

Factors that must be kept in mind to define product market (i) evidence of substitutability in recent times (it is possible that coffee and tea were considered substitutable: i.e. downfall of Brasilian coffee and increase of demand of tea) (ii) quantitative test (on price variations) (iii) consumers and competitors taste (the Commission may call them) (iv) market studies (v) entry barriers and costs to switch from one product to another 12

European Court of Justice ( ECJ) Continental Can Case (C-6/72, 21.2.1973) The European Court of Justice (Luxembourg), hereinafter the ECJ, defined in 1972 the relevant product market in the judgment Continental Can [Case Europemballage Corpn and Continental Can Inc. v Commission (JO [1972] L 7/25) ]. The Court held that when identifying a dominant position the delimitation of the relevant product market was of crucial importance. Then the ECJ defined the dominant position of undertakings, with respect to an identified product market The ECJ found that the Commission stated that Continental Can and its subsidiary (SLW) were dominant in three different product markets: cans for meat, cans for fish and metal tops. 13

Continantal Can But the Commission had not explained why these three markets were separated and different! Whish, p. 28 EC Competition Law (5h ed.) The ECJ insisted that the Commission should define the relevant product market and support its definition in a reasoned decision 14

Definition in Continental Can (1972) [those characteristics of the products in question by virtue of which they are particularly apt to satisfy an inelastic need and are only to a limited extent interchangeable with other products [demand side substitutability!] 15

Mistake by the Commission in Cont. Can The Commission had identified three markets, but did not explain why they are separated! The ECJ tried to explain the supply-side substitutability: In fact the three markets were different also from the supply side, because it was not easy to switch production from one merceological sector to another without further costs The ECJ annulled the Commission decision: The ECJ said that it should have made clear why it considered that producers of other types of containers would not be able to adapt their production to compete with Continental Can [supplyside substitutability] 16

Comment: Continental Can If other producers can enter the market(s) of food containers, then Continental Can and its subsidiary might not be monopolist, or dominant in one of the (or in the three) identified market(s): therefore they cannot abuse because they might have not a dominant position In other words the Commission had not said why it was excluded that other competitors would have not be able to enter those markets Annullement by the ECJ 17

United Brands (Case 27/76) Another important case, as Continental Can, in the genetics of Competition Law The appeal to the Court of Justice vis à vis the Commission Decision was that the bananas were in the same market of other types of fruits, therefore enlarging the definition of relevant market. The ECJ considered that the softness, seedlessness, taste and handling quality of bananas were relevant in deciding that they could reasonably be considered to form a distinct market from that of fruit generally (Whish, 5 ed., p. 36) 18

continues Are bananas in the same market of other fruits? If yes, very large market if no, very limited market: The ECJ stated that this issue depended on whether the banana could be: singled out by such special features distinguishing it from other fruits that it is only to a limited extent interchangeable with them and is only exposed to their competition in a way that is hardly perceptible 19

United Brands: useful also to define the geographic market Waelbroek: EC Competition Law: As the notion of products market is crucial to verify whether the victim of an abuse may turn toward another equivalent product, the geographic market is crucial to verify whether the victim of an abuse may find the desired product in another geographic market! In United Brands the Geographic Market is defined as follows: with reference to a clearly defined geographic area in which [the product] is marketed and where the conditions are sufficiently homogeneous for the effect of the economic power of the undertaking concerned to be able to be evaluated. 20

United Brands Whish, p. 40: importance of defining correctly the geographic market: The Commission had excluded the UK, France and Italy from the geographic market since in those countries special arrangements existed as to the importing and marketing of bananas. United Brands argued that, even so, the Commission had drawn the geographic market too widely, since competitive conditions varied between the remaining six member States; the ECJ however concluded that the Commission had drawn it correctly 21

Another important definition: MARKET POWER Crucial to identify the dominant position or DOMINANCE It will be further defined when we will tackle Section 102 TFUE (formerly, 82 EC) 22

Market Power in United Brands 65. The dominant position thus referred to by Article (82) relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its customers. 23

Market power in Hoffmann La Roche Vitamines C-85/76 Para. 41 of the H.L.R. judgment. Furthermore although the importance of the market shares may vary from one market to another the view may legitimately be taken that very large market shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position. An undertaking which has very large market share and holds it for some time is by virtue of that share in a position of strenght. 24

Judgment of the Italian Suprema Corte di Cassazione no. 3638, 13.02.2009 An alledged abuse of dominant position for discriminatory price fixing (maintenance of highvoltage lines) Court of Appeal of Bari made a wrong assessment of the relevant product market too generical, misinterpretation of the market definition The Corte di Cassazione quashes the Court of Appeal judgment inviting the referral court to apply the ECJ / Commission definition of relevant market 25

For further clarification & insights Pierluigi Congedo King s College London and Roma 3 Email address: Pierluigi.Congedo@kcl.ac.uk alternatively Pierluigi.Congedo@ulb.ac.be 26