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InsiderTAPS (22 May 2012)

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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
22 May 2012