Joint dominance

Introduction

On March 17, 2020, the Dutch Trade and Industry Appeals Tribunal, the highest administrative-law court in the Netherlands, reversed a market analysis decision by the Dutch telecoms regulator, the Authority for Consumers and Markets (ACM) which was based on a finding of joint dominance (ACM 2020). The case throws new light on the regulatory challenges associated with joint dominance and raises questions about the relevance of this concept in digital services markets.

The ACM decision

On 27 September 2018, the ACM published its analysis regarding the provision of wholesale access at a fixed location in the Netherlands (ACM 2018). In this market, it found that VodafoneZiggo and KPN held a position of joint dominance and, as an obligation, required both firms to provide wholesale broadband access to their networks.

An important aspect of ACM’s market analysis was the use of game theory, similar to the well-known “prisoner’s dilemma” in which each of two prisoners will benefit from refusing to confess to a crime if, and only if, the other one also refuses to confess. ACM defined four alternative scenarios in which each operator either allowed or denied access to its own network. This analysis showed that both KPN and VodafoneZiggo would maximize their profits on the downstream retail Internet access market by refusing to grant access at the wholesale level. ACM thus concluded that KPN and VodafoneZiggo had an incentive to collude tacitly.

VodafoneZiggo and KPN appealed the ACM’s decision, even though it had been confirmed by the European Commission.

The Appeals Tribunal ruling

The Appeals Tribunal ruled that the ACM had failed to demonstrate the existence of joint dominance^[1] and failed to demonstrate that KPN and VodafoneZiggo would tacitly coordinate their behaviour absent regulation. Whereas ACM had adopted a scenario-based approach, the court based its decision on two separate reports submitted by the parties, one showing that KPN would be better off providing network access on a wholesale level and the other showing that would not be the case for VodafoneZiggo. The court therefore refuted ACM’s reasoning of a tacit agreement not to provide access. According to the court, ACM did not analyse whether the two competitors had an incentive to coordinate, it just assumed they had.

The court decision shows how hard it is to distinguish competitive behaviour from conscious parallel behaviour and from explicit collusion. Two authorities, using the same market information and the same set of tools, can reach diametrically opposite conclusions regarding joint dominance. Thus, when determining such cases, courts have often diverged from the approaches and decisions adopted by regulatory and competition authorities to impose either ex-ante remedies or evaluate anticompetitive conduct in the context of oligopolies.

What is meant by joint dominance?

The European competition law concept of dominance was first defined by the European Court of Justice in the United Brands case as (ECR 1978: 207, Paragraph 65):

• a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers.

A dominant firm holding such market power would have the ability to set prices above the competitive level, to reduce the production levels, to sell products of an inferior quality, or to reduce its rate of innovation below the level that would exist in a competitive market. Holding a dominant position is not unlawful, since a dominant position can be achieved by merit, but competition law does not allow companies to abuse a position of dominance to harm competitors, customers, or consumers.

A dominant position may also be enjoyed jointly by two or more independent economic undertakings in relation to a specific market. This particular circumstance has been called joint or collective dominance.

Joint dominance is not, however, just about aggregate market power of companies: there is also the need to demonstrate some form of coordinated behaviour among those firms (Kuhn 2002: 9):

• Consistent with a definition of dominance we have to define joint dominance as the ability of firms to jointly exercise market power. This involves on one hand the ability of the firms to significantly raise the prices if they acted as if they were a single firm. This would clearly never be the case for a group of firms that controls only a small share of the overall market. In addition, the more important question has to be answered whether the potentially jointly dominant firms are able to act as if they were a single entity. This is nothing else but asking the question to what extent collusion between a given set of firms in the industry is feasible.

The regulation of joint dominance

There are three potential situations in which authorities have to deal with dominance and may also have to deal with the concept of joint or collective dominance:

• In the context of ex-ante sector specific regulation such as in electronic communications services.
• In ex-ante regulatory decisions regarding mergers.
• On an ex-post basis to deal with anticompetitive behaviour.

Joint dominance has been hypothesized to occur in markets with a small number of large firms which are able to coordinate their behaviour in the market^[2] and, in doing so, charge supracompetitive prices. Such a coordination need not be explicit (that would be collusion, and per se unlawful). Therefore, joint dominance is often used as synonym for tacit collusion although they are, by definition, different concepts: the first is about market power the latter is about a firm’s behaviour. However (Holmes 2017: 102):

• A determination that competitors are collectively dominant is an assessment made by the regulator that the circumstances of the market and its structural characteristics are such as to suggest a material risk of collusion. In making the judgment the regulator need not be particularly concerned whether, if it is realised, the outcome is explicit collusion or implicit or tacit collusion. From an economic perspective the outcomes for competition are the same.

Evolving legal interpretation

The concept of joint dominance has developed through case law and has evolved over time. EU competition law recognizes the concept of collective dominance in the context of both abuse of a dominant position (through Article 102 of the European Union Treaty) and in merger regulation. It is now established that the concept of joint dominance is the same in both applications.

Early European Commission decisions stressed the existence of “economic links” among firms as a necessary condition for a finding of joint dominance. Subsequently, as the court has ruled in Gencor (ECR 1999), the notion of economic links was extended to include interdependence between the parties in a tight oligopoly within which those parties are in a position to anticipate one another’s behaviour and are therefore strongly encouraged to align their conduct in the market. This created the notion that coordination was sufficient to establish joint dominance.

In the Airtours judgment (ECR 2002), the court elaborated on the application of the concept of joint dominance to oligopolistic markets. The court set three conditions for a finding of joint dominance based on an oligopolistic market structure. First, a high degree of transparency must exist: companies must precisely and quickly be able to become aware of the other competitor’s market behaviour. Second, tacit coordination must be sustainable over time: there must be a mechanism through which retaliation for deviating behaviour can be easily implemented. Finally, existing or potential competition must be unable to disturb the coordination set in place by the collectively dominant companies.

The Airtours case is now accepted as (Holmes 2017: 14):

• the authoritative and complete statement on the law relating to collective dominance, and as the case that established the evidentiary standards that needed to be met before regulators or the courts could justifiably conclude that a market was characterised by collective dominance.

Joint dominance in digital markets

Digital businesses compete in many and varied ways. In the case of large online platforms, their success has been attributed to their capacity to attract the attention of millions of end users. With the personal data obtained from the audience, online platforms continuously develop new products and services as well as improve existing ones. In doing so, online firms are said to constantly redefine the boundaries of markets and try to compete for the market rather than compete within existing markets. Their business models are often based on selling access to end users (e.g. to advertisers) and charging a price for that access. On the end-user side of the platform, price is inconsequential. Instead of competing on price, online platforms use non-price factors to attract and keep the audience (e.g. by offering exclusive content or unique functionalities). Furthermore, if a company has multiple platforms it may create synergies by linking them through user data.

These competitive conditions in digital markets are not conducive to the existence of joint dominance. Several inter-related factors are at play:

Strong indirect network effects tend towards market concentration and make certain platforms become single dominant quickly. With large amounts of accumulated data combined with high switching costs for end-users, strong (dominant) players are hard to displace by means of conventional strategies such as fighting for market share. This creates additional incentives for others to enter these markets with innovative products/services and to compete with the dominant firm position by disrupting the market. As both incumbents, to survive, and entrants, to disrupt, constantly innovate, the boundaries of the market are constantly changing. However, competing platforms seem not to be able to coexist for long: one wins and the other is absorbed, fails, or exits the market. In this situation, it is difficult for regulators to define the relevant market and determine joint dominance.

When competition is based on rapidly changing product features rather than on price, there is substantially reduced incentive for coordination between firms, and this applies even more when scale is a critical feature of success, as in the case of platform markets. In order to survive, firms continuously try to differentiate their offers in order to achieve a superior service that may enhance their market position. The dynamic nature of digital markets competition probably makes collusion a losing or temporary strategy, and even tacit coordination is difficult to implement or sustain for long. Competition, market entry, and technology developments can disrupt any potential coordination.

In order for a finding of joint dominance to be sustained, companies must precisely and quickly be able to observe a competitor’s market behaviour. With online platforms business models this is hard to achieve. The dynamics of mergers and acquisitions, both horizontal and vertical in scope, may make longer-term strategy difficult to detect or be copied by other less able and less financially strong players in a specific market.

Joint dominance requires that there is a mechanism through which retaliation for deviating behaviour can be easily implemented. A price mechanism to retaliate can be easily and quickly implemented. However, in the case of non-price competing factors, such as product or service features, it may be hard to change fast enough to overcome potential gaps with the leading platform. In the case of single dominant digital platforms, it may be impossible to close the gap at all.

A further complication arises when considering the circumstances in which merger assessment occurs. It is much more difficult to determine the likelihood of certain market structures or links developing as a consequence of a merger, compared for example with electronic communications services markets where structural characteristics are more settled and much easier to assess.

Online platform competition is substantially focused on differentiation and non-price factors such as innovation on product/service features or better quality. Competition is thought of as occurring across many markets rather than in a particular market, where incremental market share gains may have a meaning. In digital markets, competition is disruptive and successive waves of innovation determine the next (single) dominant firm. It is therefore tacit coordination would arise and even less likely that it would be sustainable.

On the other hand, some authors refer to parallel exclusion as a powerful mechanism by which firms may sustain joint dominance (Scott and Wu 2013: 1182):

• Parallel exclusion merits greater attention, for it can be far more harmful than parallel price elevation. Setting a high price leaves the field open for new entrants and may even attract them. In contrast, parallel action that excludes new entrants both facilitates price elevation and can slow innovation. Reduced innovation has greater long-term significance for the economy. Moreover, parallel exclusion regimes may be more stable than parallel price-elevation regimes. A basic game-theoretic analysis reveals that the factors that leave price elevation vulnerable to breakdown do not apply as strongly to parallel exclusion. Indeed, in some instances, maintaining an exclusion scheme is a dominant strategy for each of the excluders. In such cases, the likelihood of collapse is even lower, yielding a potentially indefinite system of parallel exclusion.

Conclusion

The concept of joint or collective dominance appears to be more applicable to situations in which market conditions provide strong incentives for independent firms to coordinate their behaviour, either tacitly or with explicit agreement. This could be the case in the electronic communications services sector where oligopolies are common. However, distinguishing tacit coordination from competitive behaviour is often difficult in practice. Following the landmark Airtours decision, relatively few cases have been sustained when tested before higher tribunals or in courts in the European Union. Most recently this has been seen in the case of the courts overturning the regulator’s finding of joint dominance between KPN and VodafoneZiggo in the Netherlands.

The characteristics of digital platform markets suggest that findings of joint dominance will be even harder to sustain in the future. The concept of joint dominance will likely continue to be hotly debated by academics and may feature from time to time in merger control investigations. But regulators would generally be well advised to avoid making joint dominance assessments.

Endnotes

1. “Two or more undertakings can be found to enjoy a joint dominant position not only where there exist structural or other links between them but also where the structure of the relevant market is conducive to coordinated effects, that is, it encourages parallel or aligned anti-competitive behaviour on the market” (EU 2018: Recital 162). ↑
2. “Two or more undertakings can be found to enjoy a joint dominant position if, even in the absence of structural or other links between them, they operate in a market the structure of which is considered to be conducive to coordinated effects” (European Union 2002: Annex II). ↑

References

ACM (Authority for Consumers and Markets). 2018. Market Analysis of Wholesale Fixed Access, Summary. https://www.acm.nl/sites/default/files/documents/2019-04/market-analysis-wholesale-fixed-access-2019-04-19.pdf.

ACM (Authority for Consumers and Markets). 2020. Highest Administrative-Law Court in the Netherlands has Reversed ACM’s Decision to Open Up the Networks of KPN and VodafoneZiggo. https://www.acm.nl/en/publications/highest-administrative-law-court-netherlands-has-reversed-acms-decision-open-networks-kpn-and-vodafoneziggo.

ECR. 1978. United Brands Company and United Brands Continentaal BV v Commission of the European Communities. European Court Reports, Case 27/76. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A61976CJ0027.

ECR. 1999. Gencor Limited v Commission of the European Communities. European Court Reports, Case T-102/96. https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A61996TJ0102.

ECR. 2002. Airtours plc v Commission of the European Communities. European Court Reports, Case T-342/99. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A61999TJ0342.

European Union. 2002. Directive on a Common Regulatory Framework for Electronic Communications Network and Services (Framework Directive). European Union 2002/21/EC. https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32002L0021.

European Union. 2018. Directive Establishing the European Electronic Communications Code. European Union 2018/1972. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32018L1972.

Hemphill, C. Scott, and Tim Wu. 2013. “Parallel Exclusion.” Yale Law Journal 122 (2013). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1986407.

Holmes, James Robert. 2017. Collective Dominance and Oligopoly Control in European Competition Law: Dealing with Persistent Oligopoly in Markets Such as Telecommunications. PhD Thesis. Monash University. https://bridges.monash.edu/articles/Collective_dominance_and_oligopoly_control_in_European_competition_law_Dealing_with_persistent_oligopoly_in_markets_such_as_telecommunications/4628221.

Kuhn, Kai-Uwe. 2002. An Economists’ Guide Through the Joint Dominance Jungle. Michigan Law and Economics Research Paper. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=349523.