Chapter 14 Guidance on answering assessment questions

Competition law: Article 102 TFEU

LazyGurl plc (LazyGurl) is a UK manufacturer of high-quality TV viewing chairs combin­ing massage facilities, built-in speakers, and a drinks refrigerator. LazyGurl supply the chairs across the EU. LazyGurl have been the best selling high-quality chair producer for each of the last eight years, enjoying a 78 per cent market share.

However, a Belgian company, SuperChairz, has emerged as a competitive threat to LazyGurl. SuperChairz is rapidly increasing its market share by offering an equivalent quality but cheaper chair.

LazyGurl have embarked upon an EU-wide marketing campaign and have slashed prices in a special promotion. They have spoken to all of their retailers to offer discounts for bulk purchases and further discounts if they agree only to buy chairs from LazyGurl. Many retailers have been warned that if they stock the SuperChairz products, supplies of LazyGurl chairs will cease.

Advise SuperChairz.

Article 102 TFEU provides that any abuse by one or more undertakings of a dominant position within the internal market or a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.  Together with Article 101 TFEU which concerns anti-competitive agreements and collusive behaviour it completes the Treaty provisions designed to ensure that competition can develop naturally and without distortion in securing an internal market whilst protecting small business and consumers.

Article 102 only apples to undertakings.  Undertaking was defined in the case of Hofner and Elser as ‘natural or legal persons engaged in economic activity’.  As such, LazyGurl would satisfy this definition as a public limited company.

Article 102 is concerned with dominant undertakings.  In United Brands, dominance was defined as ‘a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers”’.

Thus, dominance is established by reference to the particular market concerned.  In determining the relevant market, consideration must be given to the relevant product market, the relevant geographic market and any relevant temporal (seasonal) market.

Starting with the relevant product market, this is defined in terms of product substitution/interchangability (see Commission Notice on the definition of the relevant market for the purposes of Community competition law, 2003).  Thus, it requires an analysis of consumer perception and behaviour and the ability of potential competitors to enter the market.

If products are such that customers regard them as substantially interchangeable, they are likely to be considered to be in the same product market.  This is vitally important as the wider the product market is drawn, the less likely an undertaking is to be dominant.  If an undertaking is not found to be dominant, there can be no breach of Article 102.    As such, it is expected that LazyGurl will seek to define their market in the widest possible terms, perhaps domestic furniture. However, the Commission is likely to define the market in a narrower way, perhaps luxury chairs.  A determination is made with reference to cross elasticity of demand – the willingness of a consumer to accept an alternative as a substitute, and cross elasticity of supply – the ease at which other undertakings making similar goods could enter the market and produce an alternative.

Starting with cross elasticity of demand,  it should be questioned whether a consumer would be willing to accept a traditional chair or other furniture in the event that a LazyGurl chair was not available.  With reference to the particular characteristics of the LazyGurl chair, it is submitted that this is unlikely.  LazyGurl chairs have particular characteristics that would not be found on a normal chair and as such would not be interchangeable and therefore not in the same product market. 

The Commission Notice of 2003 introduced a more quantitative approach to demand side substitutability known as the SSNIP test (Small but Significant, Non-Transitory Increase in Price).  This considers demand substitution based on customers response to a small but significant permanent increase in price in the region of 5-10%.  If it would cause the switching from one product to another, the two products are in the same product market.  Applying this to the instant case, it is submitted that due to the characteristics of the product in question (United Brands), such an increase in price is unlikely to impact upon consumer behaviour.

Considering cross elasticity of supply, it is notable that the instant case does not provide any information as regards the ease at which potential competitors could enter the market.  As such, we should be wary of speculating upon this but one argument that could be tentatively suggested is that due to the technical nature of the product in question and the expertise required to develop such a product, it may be the case that there is little cross elasticity of supply.

In light of the preceding discussion, it is therefore submitted that the relevant product market is likely to be luxury chairs.   

The next consideration is the relevant geographic market.  This was defined in United Brands as ..’.an area where the objective conditions of competition applying to the product in question are the same for all traders’.  This concerns the cost and ease of transportation, purchasing behaviour and preferences of consumers and any geographical limitations on the use of the goods or services.  With reference to the instant case, it is clear that the geographic market is the whole of the EU which would clearly amount to the ‘internal market or a substantial part of it’ (United Brands, Michelin). 

As regards the temporal market, such a market is rarely identified and there is nothing in the instant case to suggest such a seasonal market exists.

Having identified the relevant market, consideration must then be given to any indication that LazyGurl is dominant in that market.  Attention in the instant case should be drawn to its large market share (Microsoft) and other barriers to entry such as the duration of market power (Hoffman), LazyGurl’s evident financial resources (United Brands) and its conduct (United Brands).  These factors together give a strong picture of LazyGurl holding a dominant position within the luxury chair market.

It should be noted that holding a dominant position is, in itself unproblematic.  It is only where a dominant undertaking abuses such a position that Article 102 comes into play.  As such, consideration turns to signs of such abuse.  In the instant case, attention should be drawn to LazyGurl’s reaction to the emergence of a potential competitor.  By slashing its prices with the intention of eliminating such competition it is engaging in predatory pricing (IAZ International Belgium) and is likely to seek to raise prices once the competitive threat has disappeared.  Other signs of abuse include the refusal to supply (Commercial Solvents) and the discounting arrangements (Hoffman).  It should be noted however, that quantity discounts based on creating economies of scale are not an abuse if they are non-discriminatory and available to all.  Loyalty discounts such as those in the instant case are objectionable however.

Finally, it is important to establish that such behaviour may affect trade between Member States.  With reference to STM, this is easy to satisfy and rarely causes difficulty.  This is interpreted broadly and is satisfied whenever it is ‘possible to foresee with a sufficient degree of probability on the basis of a set of objective factors of law or of fact that the agreement in question may have an influence, direct or indirect, actual or potential on the pattern of trade between Member States’.  In the instant case, by seeking to eliminate emerging competition and trading across the EU, LazyGurl’s behaviour would have such an affect.