Dominance, Abuse of Dominance and the Draft Guidelines
The Chapter 2 Prohibition Guidelines was published by MyCC on 15 May 2012. The contents did
not surprise but is nonetheless much welcomed by enterprises which have assessed
themselves as being at risk.
Chapter 2 deals with dominance and abuse of
dominance. MyCC has chosen 60% as the indicative threshold. This of course
relates to market share.
Market Share – 60% rule of thumb
An enterprise with significant market share has market power to dictate price and
other trading terms without effective constraints from competitors or potential
competitors. There comes a point where competition commissions call them
‘dominant’ and apply additional rules on them.
A quick rule of thumb is
useful to see if these additional dominance rules will apply. MyCC has chosen
60% market share as indicative of significant market power suggesting possible
dominance. This figure is on the higher end of the scale amongst jurisdictions
around the world. Singapore has also chosen 60% and one can speculate this is
influenced by the level of concentration in the city state. Malaysia on the
other hand has an economic landscape which is fairly oligopolistic in a number
of areas. A higher threshold is naturally less disruptive to the status quo and
should be welcomed by business.
The Relevant Market
Market share does not exist in vacuum but must relate to the relevant product and
geographic market. The Guidelines explains that determining whether an
enterprise is dominant in the relevant market is the starting point. This is
done by applying a technical set of rules (see Market Definition Guidelines).
Getting the market definition right is of utmost importance in any self
–assessment.
Products and services are affected by substitutes and
geographical concentrations. The ability of a major supplier to increase prices
freely may be constrained by these factors. Applying relevant market definition
correctly is the crucial first step in analysing if an enterprise is truly
dominant.
Other Constraints
This 60% figure is purely indicative – an enterprise with more than 60% market share may not be considered
dominant and conversely one with less than 60% could be considered dominant. Why
is this so?
There are myriad factors at play – eg. potential competitors,
low barrier of entry into the business and few buyers with equal economic power
equal to the dominant supplier.
The Guidelines explain that potential
competitors will see opportunities when a dominant supplier decides to increase
its price to an extent that makes it attractive for other potential suppliers to
enter the market. This supplier is therefore unable to act in a dominant manner
due to potential competitors waiting on the side. Low entry barriers means the
time lag for new market entrants is shorter and this deters abusive conduct by
dominant enterprises.
The Abuse
Dominance in itself is benign
and an enterprise is not prohibited from being dominant. Economic theories
expound efficiency and innovation to benefit consumers and therefore a dominant
player who is efficient and innovative is not penalised.
Looking at it another way, Chapter 2 is not about protecting inefficient competitors or
competitors in general. It is about protecting the competitive process which is
the cornerstone of competition law. It is therefore always important to ask how
a dominant enterprise got to where it is and how it stayed there. Is it through
abusive conduct or through efficiency and innovation?
Where a major enterprise becomes dominant and tightens it grip by abusing its dominance, MyCC
will act. Abusive conduct are of 2 types – exclusionary abuse and exploitative.
Exclusionary Abuse
The Guidelines explains that this is assessed
in terms of its effect on competition. Is the conduct complained of adversely
affecting consumers and does it exclude an equally efficient competitor?
An example of exclusionary abuse is foreclosing a market to a competitor by
locking in customers with loyalty rebates which are not related to cost savings,
Customers will stick to a dominant supplier because of promised rebates kicking
in when certain volume is purchased. Another example is when a dominant supplier
refuses to sell a product needed in a downstream market or only agrees to sell
it at a higher price because the dominant supplier competes in the downstream
market as well.
Exploitative Conduct
When there is no effective competition, a dominant enterprise can raise prices to exploit the
situation. An opposite situation can occur when a dominant supplier drops prices
severely for a short period to drive out a competitor as in predatory pricing.
By itself, low prices seem to be a boon to consumers in the short term but such
predatory pricing are not meant to benefit consumers but intended to foreclose
the market so that in the longer term, it can raise prices again.
Can Abuses be Justified?
The Guidelines also mention many other instances of
abuse or potential abuse eg exclusive dealing, price discrimination, buying up
scarce intermediate resources, refusal to share essential facilities. It however
cautions that practically every case has to be looked at separately –
essentially on a case by case basis.
Section 10 (3) expressly preserve the right of a dominant enterprise to take steps which has reasonable commercial
justification or which represents a reasonable commercial response to the market
entry or market conduct of a competitor. The Guidelines provides some useful
examples – refusing to sell to a buyer which has not paid for past purchases,
refusing to grant access to a facility which is already being used to capacity,
meeting competitor’s price in the short term even though this is below costs and
offering loyalty rebates related to reduced costs in supplying particular
customers. This is of course not an exhaustive list.
Dominant enterprises should be prepared to advance its commercial reasons if they feels they are
reasonable and justified under Section 10 (3). Walking through the process and
consulting with a competition lawyer or economist will be necessary in many
cases to help distinguish between valid and invalid reasons and market
responses.
Schedule 2 Exclusion
Perhaps disappointing is the omission of more clarity to Schedule 2 exclusion. They relate to (a) agreement
or conduct to the extent it is engaged in order to comply with a legislative
intent (b) collective agreements and (c) an enterprise entrusted with the
operation of services of general economic interest or having the character of a
revenue-producing monopoly in so far as the prohibition under Chapter 1 and
Chapter 2 would obstruct the performance, in law or in fact, of the particular
tasks assigned to that enterprise.
MyCC attempted to address this in the Chapter 1 Guidelines but merely stated that it intends to construe the
exclusions narrowly and that it is for the parties seeking to benefit from the
exclusions to demonstrate they come within the exclusion. With due respect this
is of little assistance to consumers and business which are affected on a daily
basis by numerous dominant players, oligopolies and even monopolies created by
government edicts. On the flip side, these enterprises having received some form
of government edict (whether they are from the Federal, State or municipal
authorities) will want to know with some clarity whether they can take cover
under Schedule 2 exclusions.
For example, how does one construe something as engaging in a business in order to comply with a legislative
intent? How does one qualify to say it has been entrusted with services of a
general economic interest? It is fair to say that Malaysian Federal, State and
municipal authorities have a propensity to create such market situations by
awarding exclusive contracts when none existed before. The pervasiveness of
business activities operating under one form of governmental edict or another
means that the efforts to re-make the Malaysian economy as a competitive one can
be easily thwarted if Schedule 2 is generally taken as a broad-brush or blanket
exemption, rightly or wrongly.
Tay Beng Chai
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22 May 2012