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p. 12 of 62 BACK | NEXT Purpose and Structure of the Toolkit Overview of Practices Controlled by Competition Law Countries with Competition Law Systems Benefits of Competition Policy Practices Controlled by Competition Law Anti-Competitive Agreements Abusive Behavior Mergers Public Restrictions of Competition and Competition Advocacy Competition Law and Other Areas of Law and Policy Key Concepts and Tools Competition, Privatization, and Regulation Emerging Economies Enforcement Mechanisms ADB Resources and Projects Other Resources Glossary and List of Abbreviations

Competition Law Toolkit : Practices Controlled by Competition Law

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Abusive Behavior

Systems of competition law typically contain provisions designed to prevent firms with significant market power from abusing their position in the market, for example by adopting strategies designed to exclude rivals from the market through anti-competitive means. Section 2 of the Sherman Antitrust Act 1890 provides that it is a felony to monopolize, or to attempt to monopolize, trade or commerce in the United States. Article 82 of the EC Treaty prohibits the abuse of a dominant position. In Japan, Section 3 of the competition legislation of 1947 [ PDF ], as amended, prohibits the private monopolization of trade.

It is important to note that none of these laws prohibits monopoly or market dominance in itself. It is only where a monopolist or dominant firm resorts to particular types of behavior—such as selling below cost—that it might be found to be acting illegally.

Unilateral Anticompetitive Conduct

The law on unilateral conduct is complex and controversial. It is fairly easy to understand why competition law regards hard-core cartels as serious infringements: competition law is based on the belief that firms should compete with one another to win customers' business as this delivers real benefits to consumers, and so it is obvious that agreements between them not to compete will be condemned. However, it is much less obvious that the unilateral act of a particular firm should be made illegal. Generally speaking, a firm should be free to decide for itself what prices to charge and which customers to deal with, and the market will reward it for good decisions and punish it for bad ones. The state ought not to interfere, through competition law, with the operation of the free market unless there are compelling reasons for doing so. However, there may be circumstances in which there is a failure of the market mechanism, which is why competition laws of the kind described in the previous section are sometimes applied to acts of monopolization or abusive behavior.

Laws that forbid monopolization or the abuse of a dominant position must be applied in a way that distinguishes between competitive acts by dominant firms that contribute to consumer welfare and anti-competitive acts that are harmful to consumer welfare. For example, when a dominant firm discovers that a new entrant is attempting to enter its market, its natural response will be to reduce its prices in order to retain its customers' business. Basically, this is something that competition law should permit, since the law is in favor of competitive responses, both from dominant and non-dominant firms. However, it may be that the dominant firm does not simply reduce its prices; it may reduce them to the point at which it is actually making a loss, and that it does this to destroy the new entrant, after which it will put its prices back up to a supra-competitive level. Competition laws typically condemn predatory pricing [ PDF ] by dominant firms, where the only explanation of the behavior is the intention of eliminating competitors.

Predatory pricing may be unlawful, although the subject is quite complex. Other examples of behavior that might be considered anti-competitive include price discrimination [ PDF ]; discounts and rebates [ PDF ]; tying and bundling [ PDF ]; some refusals to deal, including refusals to provide access to essential facilities [ PDF ] such as pipelines, ports, airports and other infrastructures; margin squeeze [ PDF ]; and excessive pricing [ PDF ].

Generally, the difficulty with the law of predatory pricing, as with the law of monopolization and abuse, is that courts and competition authorities must try to distinguish genuinely competitive responses—which are good—from anti-competitive ones. If the law is applied in a clumsy and insensitive way, the strange paradox may follow that dominant firms decide to refrain from competition, for fear that they will be accused of acting anti-competitively, fined and sued for damages. It would clearly be a perverse result if competition law has the effect of discouraging rather then promoting competition. This issue is the subject of much current debate. The European Commission has been conducting a review of the position under Article 82, and published a Discussion Paper in December 2005 on the treatment of exclusionary abuses under Article 82 of the EC Treaty. The OECD held an important roundtable discussion [ PDF ] on the topic of "Competition on the Merits" in December 2005 that discussed many of the issues relevant to the problem of regulating unilateral conduct.

The International Competition Network decided at its Annual Conference in Cape Town in May 2006 to establish a Working Group on Unilateral Conduct. See its draft mandate.

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