Abuse of dominance and monopolisation

Financial Express, September 22, 2009

By Cornelius Dube and Pradeep S Mehta

Vijay Kelkar, in a recent speech, suggested that ONGC and Reliance Industries should be given the freedom to fix the prices of natural gas that moves in tandem with international crude oil prices. In order to address market imperfections, he cited the Australian regulatory model, which has detailed provisions on pricing, production, operations, including tariffs and safety, as also enforcement of competition policy to curb the potential abuse arising out of possible monopolistic powers.

The essence of the new Competition Act, 2002, is to curb abuse of dominance and other anti-competitive practices, rather than frown upon size. On May 20, 2009, the Competition Commission of India became ready to begin operations after the notification of sections 3 and 4 of the Act. The sections contain provisions relating to anticompetitive agreements and abuse of dominance, respectively. CCI becomes operational at a time when countries such as the US have expressed renewed determination to pursue abuse of dominance cases under the Obama administration. During the same period that CCI became operational, some interesting decisions on abuse of dominance were being made by competition agencies in different parts of the world.

Recently, a fine of 1.06 billion euros was imposed on the world’s biggest chipmaker Intel by the European Commission, for abuse of dominance after the Commission found that Intel had engaged in a behaviour aimed at squeezing out its main rival, AMD, through illegal secret rebates so that computer makers mostly use Intel chips.

Competition authorities normally apply what is known as the ‘essential facility doctrine’ to justify the need for monopoly or dominant firms to share their facilities with their competitors. The doctrine, which originated from a commentary on a US Antitrust case law, is based on the existence on an ‘essential facility’, which the European Commission defines as “a facility or infrastructure, without access to which competitors cannot provide services to their customers, and which cannot be replicated by any reasonable means.” What this implies is that there would be a dominant firm operating in both the upstream and downstream markets, and competitors would be failing to compete with it in one market because they can not access its essential facility, usually in the upstream market.

Three conditions normally result in competition authorities deciding that the incumbent is liable to share its essential facility with potential competitors. Firstly, the essential facility should be controlled by a monopolist in the relevant geographic market. Secondly, it should be virtually impractical for competitors to reasonably duplicate the essential facility. Finally, the owner of the facility would have denied or refused the competitors access or use of the facility under reasonable commercial terms.

The recent case of the Belgium’s dominant telecom operator is precisely in this arena. The Belgian Competition Council levied a record fine to date of 66.3 million euros ($92.6 million). Between 2004 and 2005, the group’s mobile phone arm, Proximus, charged its end-user prices that were lower than the wholesale prices it charged to competitors to use its network, thus ensuring that they would make losses or be forced out of business.

The imposition of record fines should send signals to the Indian business community on the extent to which abuse of dominance can be costly. Unlike the old MRTP Act, the Competition Act, 2002, provides for fines. However, penalising a dominant company refusing to allow rivals to use its own facilities could cause discomfort among dominant firms. Businesses would feel justified in refusing to share their facilities with their competitors, as competitors would be obviously taking customers from an incumbent firm using its facility. However, such action can fall under abuse of dominance under the competition law.

Private players in the Indian telecom industry have been raising allegations on the refusal of interconnection and ‘common carrier’ facilities by the dominant fixed-line incumbents. The same concerns also pertain to the electricity sector, where the open access mechanism and common carrier principles continue to exist only on paper, amid allegations that existing distribution companies and state governments have barred access to prospective private utilities. The petroleum & natural gas sector is also not immune to the problems. Consequently, the Petroleum and Natural Gas Regulatory Board came up with regulations specifying the pipeline access code to ensure access to common carrier for fair competition amongst entities. Thus, there is scope for investigations into abuse of dominance cases related to essential facilities in many sectors in India.

Indian laws do not exempt government enterprises and so government departments and government-owned entities engaged in economic activities and in dominant positions should not abuse their dominance. Allegations of refusal of smaller Internet service providers by BSNL and MTNL access to facilities for offering Internet telephony services under reasonable fees could be examples. Competition law also descends heavily on abuse of dominance concerning the implementation of the open facility principle, where the company uses predatory pricing to try to squeeze competitors out of the market, even after agreeing to allow them to use its networks in the first place.

Thus, as the stage is set for tackling abuse of dominance, there is every reason for dominant abusive firms to worry, regardless of whether they are private or public enterprises.

Cornelius Dube is Economist, CUTS Centre for Competition, Investment and Economic Regulation and can be reached at cd@cuts.org and Pradeep S Mehta is Secretary General, CUTS International and can be reached at psm@cuts.org

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