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What is meat by abuse of “dominant position “.explain pricing
strategies and abuse of dominant position.
Introduction
The concept of "abuse of dominant position" is central to
competition law, as it ensures that firms with significant market
power do not exploit their dominance to harm competition,
consumers, or market efficiency. While having a dominant position
in a market is not inherently unlawful, using that position to
engage in anti-competitive practices is prohibited. This paper
explores the meaning of abuse of dominant position, examines
various pricing strategies associated with such abuse, and
evaluates their impact on market dynamics and competition.
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Abuse of Dominant Position: Definition and Key Principles
A firm is said to be in a dominant position when it holds significant
market power, enabling it to operate independently of its
competitors, customers, or suppliers. Dominance is typically
determined based on factors like market share, control over
critical resources, barriers to entry, and economic power. Abuse of
this dominance arises when a firm engages in practices that
distort competition or harm consumer welfare.
Legal Framework
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1. EU Competition Law: Under Article 102 of the Treaty on the
Functioning of the European Union (TFEU), abuse of dominance
includes practices such as unfair pricing, limiting production, or
imposing discriminatory conditions.
2. US Antitrust Law: The Sherman Antitrust Act prohibits
monopolistic behavior and abuse of dominant power.
3. Indian Competition Law: Section 4 of the Competition Act, 2002,
defines abuse of dominance, highlighting unfair practices such as
denial of market access and predatory pricing.
Key Elements of Abuse:
1. Existence of Dominance: A firm must hold significant market
power.
2. Anti-Competitive Behavior: The firm must engage in practices
that harm competitors or consumers.
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3. Adverse Effects: The practice must distort competition, restrict
market access, or reduce consumer welfare.
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Pricing Strategies and Abuse of Dominant Position
Abuse of dominance often manifests through pricing strategies
that distort competition or exploit consumers. The following are
key pricing practices associated with such abuse:
1. Predatory Pricing
Definition: Predatory pricing occurs when a dominant firm sets
prices below its cost of production with the intention of driving
competitors out of the market. Once competitors are eliminated,
the firm raises prices to recoup losses.
Legal Assessment: Competition authorities assess whether the
firm is pricing below cost and whether there is an intention to
eliminate competition.
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Impact:
Short-Term: Consumers benefit from lower prices.
Long-Term: Reduced competition leads to monopolistic pricing,
harming consumers.
Case Example: Akzo Chemie BV v Commission of the European
Communities (1991) – The European Court of Justice found Akzo
guilty of predatory pricing to eliminate competitors.
2. Excessive Pricing
Definition: Excessive pricing occurs when a dominant firm charges
prices significantly higher than the competitive market level,
exploiting consumers in the absence of viable alternatives.
Legal Assessment: Authorities examine whether prices are
unjustifiably high compared to production costs or comparable
markets.
Impact:
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Consumers face reduced affordability and access.
Entrants may hesitate to compete due to the price-setting power
of the dominant firm.
Case Example: In the United Brands case (1978), the European
Court of Justice held that United Brands had engaged in excessive
pricing by exploiting its dominance in the banana market.
3. Price Discrimination
Definition: Price discrimination involves charging different prices to
different customers for the same product or service without a
justified economic basis.
Legal Assessment: This practice is deemed abusive if it harms
competition or discriminates between buyers to distort market
outcomes.
Impact:
Larger buyers may gain unfair advantages, sidelining smaller
competitors.
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Consumer choice is limited due to the concentration of market
power.
Example: Discriminatory freight charges in sectors like logistics
and transport.
4. Margin Squeezing
Definition: A vertically integrated firm (operating at multiple levels
of the supply chain) sets high wholesale prices for competitors
while maintaining low retail prices, effectively squeezing the profit
margins of downstream competitors.
Legal Assessment: Authorities investigate whether the margin
between the upstream and downstream price is sufficient for
competitors to operate profitably.
Impact:
Downstream competitors exit the market.
The dominant firm strengthens its position across the value chain.
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Case Example: In the Deutsche Telekom case, the firm was
penalized for margin squeezing in the broadband market.
5. Loyalty Rebates and Exclusive Discounts
Definition: Loyalty rebates or discounts are conditional incentives
offered by a dominant firm to customers, requiring them to source
exclusively or primarily from the firm.
Legal Assessment: Such rebates are deemed abusive if they
foreclose market opportunities for competitors.
Impact:
Competitors lose market access as customers are locked into
exclusive arrangements.
Innovation and consumer choice decline.
Case Example: Intel v European Commission (2014) – Intel was
fined for offering loyalty rebates to discourage customers from
purchasing rival products.
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Economic and Legal Implications of Abusive Pricing Practices
1. Consumer Welfare:
Initially, consumers may benefit from practices like predatory
pricing (low prices).
Over time, the lack of competition can lead to higher prices, lower
quality, and reduced innovation.
2. Barriers to Entry:
Abusive pricing strategies deter new entrants, allowing the
dominant firm to consolidate its position.
Entry barriers harm competition and market dynamism.
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3. Market Distortion:
Practices like margin squeezing and loyalty rebates distort
competitive neutrality, favoring the dominant firm at the expense
of smaller competitors.
Markets become less efficient, harming overall economic welfare.
4. Enforcement Challenges:
Competition authorities face the challenge of distinguishing
competitive behavior from abusive practices.
Establishing intent, dominance, and market harm requires detailed
economic analysis.
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Conclusion
Abuse of dominant position, particularly through pricing strategies,
represents a critical concern in competition law. Practices like
predatory pricing, excessive pricing, and margin squeezing
undermine competition, reduce consumer welfare, and stifle
innovation. While dominance itself is not illegal, its abuse
destabilizes markets, making robust enforcement of antitrust laws
essential. As markets evolve, particularly in the digital and global
economy, competition authorities must continuously adapt their
frameworks to address new challenges, ensuring that markets
remain competitive, fair, and accessible. This balance is key to
fostering economic growth and protecting consumers in the long
term.
