Social and political backgrounds frequently influence the shape of a competition regime, which indicates distinctive diversity in competition law philosophy across its borders. We can, however, observe a significant level of convergence in the substantive provisions of competition law, which come from the increasing globalisation of economies. For example, there are notable differences in the competition rules on abuse of market dominance (or monopolisation) between the EU and the US. In the EU, the concept of abuse covers both exclusionary and exploitative abuses,1) such as excessive (or high) prices and discriminatory prices or conditions.2) In the US, however, it is hard to find a competition law violation relating to pricing abuse because American judges believe that a high or excessive price induces more competition, thereby improving competition in the market.3)
On the contrary, the EU has adopted a rule against exploitation of market-dominant undertakings, thereby prohibiting unfair pricing; although there have been very few unfair pricing cases in the EU.4) In sum, the EU competition regime categorises exploitative abuse as charging excessive prices or unfair contractual terms and conditions while the US Clayton Act outlaws only price discrimination;5) thus, there is a distinguished concept of fair competition in the EU, and fair competition may be interpreted as fair to competition or efficiency.6) Interestingly, the public often seems to believe this notion protects competitors.
In particular, this European approach has affected developing countries in Asia, and Korea is no exception. Korea adopted competition law in 1980 through the Monopoly Regulation and Fair Trade Act (MRFTA),7) and developed legal techniques in adopting its policy promoting vigorous enforcement. The MRFTA, similar to EU competition law, contains a provision on unfair pricing. This means that the Korean competition regime shares the ideology of fair competition with the EU. In effect, most transitional economies, especially in Asia, often face large conglomerates that bring socio-political problems, causing developing countries to favour wide interpretation of fair competition in the EU for restricting exploitation by large firms.8)
Therefore, the competition agencies in the EU and Korea, the European Commission (hereinafter the Commission) and the Korea Fair Trade Commission (KFTC), respectively, have implemented competition rules on abuse of market dominance with regard to excessive pricing and price discrimination. However, they often fail to prove anti-competitive harms through this type of business conduct because it is difficult to prove its negative effects on consumers or its ability to distort competition.9) In particular, a case in the EU, i.e., MEO,10) involving price discrimination was recently issued; this case law would provide clearer guidance to the competition authorities and economic entities in Europe, thereby helping them better understand the meaning of exploitation through assessing the concept of a competitive disadvantage in competition law.
The MEO case has become useful in apprehending the trend of EU competition law and its future implications in other competition regimes because the MEO judgment confirmed the more-effects-based approach, as discussed in the Intel case.11) In other words, it is necessary to adopt economic principles when assessing all varieties of abuse-of-market-dominance cases, which allows the US-type rule of reason. This consequently confirms the answer to difficult enquiries about fair competition. Modern competition regimes need to acknowledge the role of economic assessment, resulting in abandoning per se abuse or ‘object-type’ abuse.12) This may globally affect competition law. In particular, it appears that the MEO case would influence the approach in the intellectual property field.
The Korean competition regime has followed the formalistic approach, which is an old-fashioned, form-based method from the EU, but both European agencies and courts have shifted toward the more-effects-based approaches through modernisation efforts.13) Therefore, it is timely to discuss recent developments in the EU, focusing on MEO and other relevant cases like Intel, because this discussion may help the Korean competition authorities and courts better understand the concept of competitive disadvantage in the market when they face complex issues on exploitative abuse. This article consists of four sections, including the Introduction. Section II explains the substantive provision of abuses of market dominance relating to exploitation from a comparative perspective. This section focuses on the meaning of fair competition. Section III discusses the MEO case, demonstrating its development in adopting economic appraisals in unilateral cases. It further provides suggestions for the Korean competition regime by debating the issue of improving consumer welfare. Lastly, Section IV summarises and concludes this article.
Ⅱ. The Competition Rule of Exploitative Abuse from a Comparative Perspective
Historically, our modern society has been concerned about harm from exploitation by large firms. Raising a price from a market power has been seen as a classic social harm by a monopolist,14) namely ‘a monopoly rent’.15) ‘Market power’ also indicates a monopolist’s ability to gain profits by increasing prices above the competitive market price.16) Adam Smith asserted that the monopoly price is the highest while the competitive price is the lowest.17) His statement presented a monopolist’s harm to consumers by exploiting their welfare.18) Furthermore, commentators have explained that monopolists often try to categorise prices through various methods, and this type of practice may reduce consumer welfare.19) Where an undertaking can practise persistent price discrimination, it may thus prove the existence of market power.20)
In addition, the EU has clarified its objective of a “highly competitive social market economy” as prescribed in Article 3(3) of the Treaty on the European Union (TEU).21) The idea of social market economy is based on ordoliberalism,22) which has developed the imposition of ‘special responsibility’ on a business with a market-dominant position;23) this is the so-called “native European abuse control approach”.24) Furthermore, this notion influenced the implementation of the rule on exploitation and discrimination in Article 102 of the Treaty on the Functioning of the European Union (TFEU), prohibiting abuse of market dominance. Therefore, the EU competition authorities are concerned about excessive pricing of large undertakings, but there is no clear “standard formula by which excessive pricing may be identified”.25)
Article 102 TFEU provides a list of prohibited abuses and does not spell out that it is an exhaustive list. For example, Article 102(a) widely covers all type of exploitative abuse by stating unfair prices and trading conditions; Article 102(b) encompasses all exclusionary abuses; Article 102(c) broadly covers discriminatory abuses; and Article 102(d) deals with tying and bundling.26) Importantly, the settled case law of the Court of Justice of the European Union (CJEU) has confirmed that the goal of Article 102 is to protect consumers directly or indirectly from exploitative and exclusionary abuses.27) There were numerous cases relating to excessive pricing in the EU, but the CJEU held that it is crucial to provide evidentiary proof excessive pricing, considering its “economic value”.28) In contrast, some commentators criticise that the standard of proof for the competitive disadvantage in Article 102(c) is lower than that for exclusionary abuses.29) However, this approach was eventually revised in the MEO case, which is further discussed in Section III.
The MRFTA also contains an analogous provision in Article 3-2, with its prohibition of abuses of market dominance; it also broadly covers both exclusionary and exploitative abuses. In particular, Article 2-3(1)(2) and (5) MRFTA prohibit unfair restrictions on outputs and impeding consumer interests. Similar to the case law relating to discrimination under Article 102(c) TFEU,30) the Korean case law of exploitation is often confusingly implemented as criticised in the T-Broad Gangseo Broadcasting case.31) In that case, the Supreme Court of Korea held that the undertaking’s practice had resulted in disadvantages on a certain firm, but it would not generate anti-competitive outcomes. This holding implied that a simple disadvantage does amount to exploitation in violation of Article 3-2, which seems to be in line with the EU’s MEO judgment.
However, there are existing differences between the two competition regimes as follows. First, the MRFTA provides Article 23, prohibiting unfair business practices, and this broadly covers almost all types of unfair conduct. Moreover, the application of Article 23 overlaps with unilateral conduct under Article 3-2. Among others, the spin-off legislation of fair competition from Article 23, such as franchise, large-scale distribution, or subcontract areas, has a stringent and formalistic provision. This black-list provision often includes exploitative abuses like unfairly fixing consideration in subcontracting, which easily leads to a violation.32) The recent case law on fixing consideration in subcontracting has amended the formalistic approach,33) but this provision is still considered a straitjacket-type or quasi-per se illegal approach, because the KFTC need not prove anti-competitive effects; the existence of a unilateral decision in the process of the agreement and unfair consideration in subcontracting is sufficient.
Second, the law of exploitation in Korea does not seem to influence the area of exclusionary abuse or other fields, such as intellectual property. Nevertheless, recent case law development in the EU as shown in Intel and MEO demonstrate the heavy burden of anti-competitive effects of exclusionary or exploitative abuse. Additionally, many believe that the recent EU cases will affect the appraisals in the Article 102 TFEU cases relating to Standard Essential Patent (SEP) and its Fair, Reasonable, and Non-Discriminatory (FRAND) conditions. In other words, the two cases of Intel and MEO would confirm the economic principles for the assessment of unilateral conduct, even in FRAND cases, because FRAND is related to issues of discrimination and exploitation.34) In sum, the MEO case has become influential in the EU, and may eventually affect other competition regimes in the world.
As discussed earlier, there is no robust formula for assessing excessive pricing. The only way to determine excessive pricing is to measure the economic value35) of the product or transaction in question and the market entry barrier.36) Due to intrinsic difficulties, the Commission often applies Article 102 TFEU to excessive pricing by a market-dominant undertaking, where its conduct also relates to exclusionary abuse.37) The Commission has been concerned about an exploitative abuse where it is a de facto discriminatory abuse.38) The most recent case of pure excessive pricing discussed by the Commission was Port of Helsingborg.39) In this case, the Commission appeared to rely on the CJEU’s judgment on United Brand Chiquita (UBC);40) the Commission decided that economic value could not be concluded by adding more costs to the product’s profit margin41) that would be “a predetermined percentage of the production costs”.42)
This decision demonstrates a practical difficulty in collecting sufficient evidence to determine that a market-dominant undertaking charges excessive pricing.43) Strictly speaking, it is not easy to find a real indicator explaining an exact economic value of goods because the competition agency needs to rely on a hypothetical market price from perfect competition.44) Furthermore, having a market-dominant position is not per se illegal, and imposing a burden of avoiding excessive pricing may influence firms’ incentives to reduce costs and investment for innovation. In addition, some assert that excessive prices induce more competition by attracting entrants;45) the market is thus self-correcting.46) This argument has been confirmed in the US courts, where US antitrust lawyers believe that the mere possession of monopoly power and the charges of monopoly pricing are lawful and are considered to be a crucial factor of the ‘free-market system’.47)
In effect, several cases of pure excessive pricing have been recently discussed in a number of EU Member States. For instance, the UK’s Competition Appeal Tribunal (CAT) quashed fines on two pharmaceutical undertakings, Pfizer and Flynn, for their price increase of 2,600% because the UK Competition and Markets Authority (CMA) had failed to identify “a benchmark price or price range” that would be essential for examining the “conditions of normal and sufficiently effective competition”.48) A similar conclusion was also made in South Africa.49) This case law highlights the burden of proof relating to exploitative abuses.
Likewise, it is timely to discuss the complex issue of unfair pricing and the concept of competitive disadvantage. Many countries, including Korea, have established pricing regulatory frameworks in a number of network and utility sectors for several reasons.50) In this case, governments often establish a regulatory system of ex ante price control.51) Among other factors, consumer welfare or efficiency lies at the heart of price regulation in these industries. Except in this case it seems that excessive intervention of pricing in the process of competition may harm consumer welfare in the long run. If we excessively emphasise fairness in the market for protecting competitors, it would harm the competitive process, thereby reducing consumer welfare. In other words, unclear standards of examining unfair pricing may bring more confusion in the market.52)
Therefore, it is necessary to examine whether the market in question is characterised by high fixed costs and low marginal costs.53) In this case, imposing pressures on undertakings to commit the rule on excessive pricing may result in notable profit losses when they cannot recover the costs due to the high level of market intervention.54) Consumer welfare, then, should play an important role by examining anti-competitive effects from exploitation because consumer interest should be interpreted as an ultimate goal of competition law in Korea.55) Critics also argue that a plaintiff should prove that a business practice of imposing unreasonable disadvantage on its rivals at least harms competition to establish a violation of competition law.56) Therefore, the current assessments on excessive pricing in several competition regimes above can be considered as the more-effects-based approaches.
Ⅲ. Recent Development of the Rule of Exploitative Abuse: Intel and MEO
The MEO case involves price discrimination that is an exploitative abuse. In the MEO case, a television broadcaster complained that GDA, a collecting society, had abused its market position by charging a higher royalty for audio-visual content than its rival in the market; but the Portuguese competition agency decided that the different royalty rate had not brought any anti-competitive concerns. MEO did not accept this decision and brought the case in front of the Portuguese competition court, and the court referred enquiries to the CJEU, which is the preliminary reference.57) In this case, GDA provided a three-tariff wholesale offering which was imposing different tariffs on numerous undertakings between 2010 and 2013, providing the paid TV signal transmission service and content.58)
The CJEU held that it was necessary to find that GDA’s practice had been discriminatory and that it had tended to distort competition.59) It then concluded that a mere practice of immediate competitive disadvantage does not amount to distortion of competition.60) Therefore, the competition agency and court needed to examine all circumstances of the discriminatory practice.61) In sum, the CJEU held that a violation of Article 102(c) requires “an analysis of all the relevant circumstances of the case leading to the conclusion that that behaviour has an effect on the costs, profits or any other relevant interests of one or more of those partners”.62) In fact, the CJEU confirmed this rationale in the Intel judgment63) by providing an analogous approach.64) The Intel case held that “the possible existence of a strategy aiming to exclude from the downstream market one of its trade partners which is at least as efficient as its competitors”.65) This presents the increasing role of economic analysis in the competition courts, demonstrating notable convergence between law and economics.66)
There is no doubt that the preliminary ruling of the CJEU on MEO has become a landmark case for a number of reasons. First, the CJEU affirmed that price discrimination is not a per se abuse.67) Second, the MEO judgment confirms its focus on anti-competitive effect (distortion of competition) in the assessment of Article 102, as shown in Intel. This judgment is echoed in Intel;68) namely, a withdrawal from a stringent formalistic approach.69) Third, the MEO ruling may offer some important guidance on the enquiry about FRAND and SEP licences because the MEO case was about charging different royalties.70) This argument may lead to the issue of research and development (R&D) costs and profit margins in the SEP case in considering implementing the rule on exploitative abuse.71)
Before the MEO judgment, the General Court (GC) in the Clearstream case clarified the meaning of a competitive disadvantage, which is the practice of hindering “the competitive position of some of the business partners of that undertaking in relation to the others … [leading] to a distortion of competition”.72) The GC dismissed the undertaking’s application for annulment of the Commission decision, but it confirmed the relationship between competitive disadvantage and distortion of competition. Hence, EU case law has confirmed that the principle of the effects-based approach to abuse of market dominance can be applied not only in assessing exclusionary abuse, as discussed in Intel, but also exploitative abuse, as shown in MEO. Therefore, the case law of Article 102 has brought administrative costs for economic analysis.
As discussed in the previous section, despite existing resistance to convergence relating to the competition rules on unilateral conduct among countries,73) we can observe notable convergence in the analyses of pricing abuses across the Atlantic. This may help us understand the trend of approaches to exploitative abuse. In sum, the competition authorities and courts need to examine distortion of competition in all kinds of abusive conduct.
There are discussions on whether the MEO judgment provides important guidance for assessing FRAND royalties during the licensing negotiation because the case dealt with fair prices, and may be interpreted broadly.74) Some commentators have argued that this judgment may provide broad implications in the FRAND context. This case may thus become essential in interpreting FRAND since discriminatory pricing among licensees is still controversial. In effect, the Commission has confirmed that SEP holders should not discriminate against licensees who are similarly situated under FRAND commitments. However, it has not clarified the requirements of proof for an Article 102 violation, such as whether it is sufficient to prove distortion of competition between the similarly situated implementers or certain harm to a licensee rather than harm to competition.75)
In the MEO case, the CJEU confirmed that price discrimination is a violation of Article 102 TFEU where the discrimination leads to a distortion of competition. Some assert that the Court’s conclusion may provide guidance about the scope of charging different royalties to similarly situated licensees without infringing on FRAND commitments, unless it distorts competition.76) In particular, the developed case law relating to excessive pricing, especially of UBC or Helsingborg, is not very helpful or useful in identifying excessive pricing or appropriate levels of royalty fees.77) The mere statements of the product’s economic value in UBC and of “exceptional circumstances” in Huawei78) do not articulate a criterion of excessive pricing or discriminatory abuse.
Nonetheless, the European case law seems to establish a clearer standard for assessing abuse of market dominance. The competition rule on exploitative abuse, including excessive pricing, may be used as protection against a targeted small and medium-sized enterprise (SME) or competitor, which impedes the competitive process. The concept of promoting economic freedom often relates to the idea of fairness that leads to a strong argument for protecting SME.79) Nevertheless, protection of SME or certain undertakings may harm consumer welfare when it merely imposes an obligation to charge a reasonable price without economic consideration. In effect, a more-effects-based approach to exploitative abuse should focus on consumer welfare80) because this may eliminate possible confusion between the two arguments: protection of competitor(s) or competition.81)
Therefore, the competition authorities and courts need to focus on improving consumer welfare by appraising a possible distortion of competition from the abuse in concern.82) The traditional two-prong test on examining excessive pricing may then be relevant; a comparison of the cost and price of production and a determination of excessive pricing itself, or by comparing the price with those of the rivals.83) As discussed in Section II, it is also possible to calculate the profit margin in excessive pricing, but it should be used for assessing the market entry barrier or market power84) because establishing the standard of what amounts to excessive profit-margin is not easy.85)
In addition, regarding FRAND, several competition regimes have struggled to establish concrete criteria for determining whether discriminatory royalty fees violate competition law. In particular, the KFTC issued its decision on Qualcomm for an infringement of FRAND commitment.86) The KFTC asserted that Qualcomm had coerced mobile phone businesses to accept unfair licensing terms and conditions. The market-dominant undertaking further refused to license its competitors by avoiding its FRAND terms. Accordingly, the KFTC concluded that Qualcomm’s practices had constituted abuse of market dominance under Article 3-2 MRFTA.
It is too early to conclude the exact implication of the MEO case on FRAND because the CJEU did not discuss whether its interpretation of competitive disadvantage in Article 102(c) TFEU can be applicable to FRAND or excessive pricing. Moreover, the MEO case did not involve FRAND terms, which does not include the exceptional circumstances in the EU case law like Huawei.87) However, one may argue that the MEO judgment is likely to affect development in the assessment of FRAND cases. To date, many believe that, where the exploitative abuse at issue is not anti-competitive,88) the business practice does not constitute an abuse under competition law. Therefore, it appears that identifying the borderline between the appropriate rewards of SEP as the result of R&D investment for innovation or dynamic efficiency and the unlawful use of market power through exploitative abuse has become essential;89) the ex post reward from R&D efforts by charging high fees encourages ex ante investment in innovation.90) In consideration of this specific issue, it is necessary to examine the scope of discrimination in FRAND commitments. At that same time, we need to admit that the problem of assessment cost of analysing profit margins in excessive pricing (or FRAND) is a difficult subject.
Ⅳ. Concluding Remarks
The topic of necessary and appropriate governmental power to regulate competition has long been one of the critical issues around the world. In particular, it seems almost impossible to have a single opinion about this issue when it involves exploitative abuse. There are divergent views on the concept of exploitative abuse and competitive disadvantage. However, the EU has issued a landmark judgment on price discrimination, and this case can offer some guidance to Korea when the KFTC implements the analogous provision on discriminatory abuse. In particular, the KFTC needs to understand that the concept of ‘fair competition’ is not equal to ‘exploitative abuse’. Fair competition does not require consumer welfare, while the assessment of exploitative abuse demands the proof of harm to the consumer.91)
In particular, the idea of enhancing consumer welfare through preventing distortion of competition should play a key role of competition law enforcement. With regard to unfair pricing, one needs to consider the practical meaning of consumer interests from public enforcement because governmental intervention of a competition authority is regulatory by its very nature. The public authorities should also admit that there are practical difficulties in ascertaining whether price-setting by a market-dominant undertaking is sufficiently excessive to be designated as unfair,92) which imposes a duty of proving the economic value of the product or service at issue.93) In other words, it is not an easy task to determine whether price discrimination is “a desirable response to competition”, resulting in efficiency.94)
Some assert that competition law itself is one of the most complex and technical fields of law,95) which highlights the difficulties in assessing the negative and positive effects of a business conduct of concern. In fact, the recent Qualcomm case in Korea and the MEO case in the EU have brought interesting questions for competition law: can discriminatory and excessive pricing be an abuse under competition law? As critics argue, exclusionary (anti-competitive) effect is a necessary condition for determining a violation of exploitative abuse.96)
In conclusion, the idea of fair competition for fair pricing in the EU has helped establish rationale for prohibiting unfair pricing and discriminatory abuse. The settled case law in the EU, such as Intel and MEO, demonstrate the meaning of the more-effects-based approach in the assessment of an abuse,97) which has resulted in a pro-economic principle. The EU case law demonstrates that a mere competitive disadvantage cannot be an abuse, and its recent development relating to exploitative abuse can be an important inference, which may influence the Korean competition regime. It hints at why a mere disadvantage does not mean a distortion of competition as discussed from the MEO test. Without eliminating an ambiguous indicator of fair competition against exploitative abuse, it is impossible to establish a sound competition law system.98) Korean case law provides little guidance in determining exploitative abuse, and the recent EU cases provide some implications for Korea.