Dominance is not unlawful

Elena JIPA

Head of Competition Law Department

SCA Hahui & Associate

The European competition law (Art.82 Treaty of Rome) accepts the existence of dominant companies; however, it encloses as well a power to control their conduct by forbidding abuse of the dominance. Dominance is tolerated, but its potential to foster inefficiency is subjected to supervision.

 In contrast, some dominant positions are not simply tolerated, they are even welcomed. In some markets the absence of competition is not to be wailed. It must not be forgotten that competition is only a means to an efficient end, and some markets operate at their most efficient without the influence of competitive pressures.

All industries have costs associated with entering them. Often, a large portion of these costs is required for investment. Larger industries, like utilities, require enormous initial investment. This barrier to entry reduces the number of possible entrants into the industry regardless of the earning of the corporations within. Natural monopolies arise where the largest supplier in an industry, often the first supplier in a market, has an overwhelming cost advantage over other actual or potential competitors; this tends to be the case in industries where fixed costs predominate, creating economies of scale which are large in relation to the size of the market - examples include water services and electricity. It is very expensive to build transmission networks (water/gas pipelines, electricity and telephone lines), therefore it is unlikely that a potential competitor would be willing to make the capital investment needed to even enter the monopolists market. Similarly, a duplication of railway lines may be inefficient; yet, in this instance the railway is not immunized from competition from other means of transport.

Though it might sound paradoxical, there may be reasons why competition might be even injurious to the markets, failing to achieve one of the key aims of competition: research and innovation. An inventor may be not willing to spend time, money and precious know-how on a new product that would be immense benefit to society if he or she knows that as soon as the product appears on the market the design will be immediately copied by competitors, who will grab the profits having engaged no costs (the so called ‘free rider’ risk). These examples of the undesirability of competition emphasize the role of workable, rather than perfect, competition as a guiding principle.

 Being given the case of natural monopolies and their special competition regime, the function of the law becomes the control of potential adverse effects of the lack of competition for the economy. Thus, price controls and safety standards may be imposed on suppliers of naturally monopolistic goods. This may be achieved by specific legislative controls.

 Nonetheless, the notion of abuse, though flexible, is simultaneously unstructured and simplistic. It leaves a considerable degree of discretion to the competition authorities to supervise dominant firms in accordance with their own perceptions of proper market development. For example, although unfair pricing may be held abusive, the notion of unfairness is imprecise.

 Consequently, the example of the inventor reluctant to innovate suggests a situation where the law should not tolerate or welcome dominance. By granting the inventor an exclusive right to make and sell the product in a territory for a stipulated period, the law recognizes that the competition is not efficient and therefore, agrees for its suppression by granting the inventor a legally enforceable immunity from it. This is the field of intellectual property law – patents, copyrights, trademarks, and allied rights. However, even this desirable position of economic strength requires supervision, and Art.82, while not questioning the existence of the legal protection, demands that it is not abusively exercised.

 Therefore, Art.82 permits supervision of tactics pursued by monopolists that are considered abusive. Art.82, then, does not outlaw dominance. However, weather the dominance is merely tolerated or positively welcomed, it is subject to a flexible prohibition against its abuse.