(In)admissibility of Price Discrimination
Many companies have already faced the question of whether it is legally admissible to discriminate their clients and sell them products under different terms of sale or at different prices. Commercial entities doing business with consumers on the market are undoubtedly aware that this is a field that requires particular precaution and that with (price) discrimination when selling to the consumers a company can all too easily commit a violation of the regulations governing consumer protection. But what about business entities doing business on the market with other commercial entities and entering into so-called B2B (business-to-business) transactions?
In B2B transactions commercial entities are much more free to decide whether they will enter into a business relationship with a certain partner or not, and if they will, under what conditions. In these types of transactions the companies have the right to decide independently under what conditions and at what price they are willing to sell a certain product to their customers. Thereby, they are not obliged to sell the goods to all the customers under the same price. Price discrimination can take different forms. The seller can offer goods to certain customers at a lower price than to others, while it can also offer additional discounts on “regular” prices or more favourable terms of payment to certain customers. If the buyers are each others’ competitors, this means that such price discrimination by the seller necessarily has an impact on the competition between the buyers (the latter have either higher production costs due to higher purchase costs or in the case of companies active in sales, the buyer generates smaller margins when reselling goods if it wants to remain (price-)competitive to its competitor which buys goods at lower prices). Moreover, the seller may offer its buyers so-called exclusivity rebates – i.e. rebates in case the buyer buys its entire or major part of products at the seller. Such rebates can cause the exclusion of companies on the market, which sell the same type of products than the company which grants rebates for exclusivity.
Thus, in terms of competition, price discrimination can have an impact on the competition between the companies operating on the markets that are in a vertical relation to the market on which the company exercising price discrimination operates. Competition protection rules do not interfere with such practices on the market if the company conducting discriminatory practices does not have a dominant position. However, as soon as the company has dominant position on the market, such conduct may be disputable and consequently prohibited.
When does a company have dominant position
The Prevention of Restriction of Competition Act stipulates that a company have dominant position on the market when it is able to act to an appreciable degree independently of its competitors, customers and consumers. When analysing whether a company has dominant position on the market, in particular market share, financing possibilities, legal and actual entry barriers, access to suppliers or market and existing and potential competition are taken into account. The act has established the presumption that the company has a dominant position (“dominant position”) if its market share on the Slovene market exceeds 40% (whereby this limit is not absolute and a possible dominant position of the company is assessed on a case-to-case basis).
Are price discrimination practices allowed to dominant companies?
Although the dominant position of a company on the market is not prohibited as such, restrictions apply to dominant companies when acting on the market. With regard to price practices a principal prohibition of discrimination between comparable customers of a dominant company applied in the past, which would place such customers at a competitive disadvantage. However, more recent case law of the Court of Justice of the European Union departs from the formalistic approach and gives greater emphasis to the analysis of (anti-)competitive effects of disputed behaviour also with regard to such discrimination. Different bonus schemes and discounts are namely an integral part of the usual commercial environment. Therefore, we are dealing with prohibited abuse only if it is likely that such schemes or price discrimination would have a negative impact on the competition.
In a recent decision dated April 2018 (case MEO) the Court of Justice of the European Union addressed a case where the dominant company was using different rates in doing business with its customers, so that it used three rates within the framework of wholesale (the providers of the paid television signal transmission and its content were charged for the same service at three different tariffs). The reproach to the dominant company was that it is applying different terms, whereby it is distorting competition on the market where the customer paying the (higher) rate operates, and therefore it is placing the customer at competitive disadvantage compared to its other competitors which are charged at a lower tariff.
The ECJ ruled that discriminatory application of tariff as such does not constitute an abuse of dominant position, as each competitive disadvantage due to price discrimination does not necessarily imply anti-competitive effects and thereby the abuse of dominant position. Therefore, it has to be assessed in each particular case whether in case when the company with a dominant position uses discriminatory prices for downstream trading partners, such behaviour can lead to distortions of competition. This is, inter alia, determined by analysing whether discriminatory practice had an effect on the costs, profits and other interests of the company affected, whereby it has placed it at competitive disadvantage, consequently causing distortion of competition between trading partners. If discriminatorily charged goods/service as cost does not constitute a significant percentage in the aggregate costs of the company affected, if it did not have a significant impact on the profits and the company had a certain negotiating power in relation to the dominant company, it is unlikely that discriminatory practice of the company would be deemed as abuse of dominance. However, if it is likely proven that the discriminatory behaviour of the company has caused restriction or distortion of competition on the market where its trading partners operate, the behaviour of the dominant company constitutes the abuse of dominant position, which is prohibited. The analysis whether we are dealing with the abuse of dominant position or not will thus be challenging in most cases.
Sanctions in case of abuse of dominant position
We advise dominant companies to examine the competition law compliance of their rebate or bonus schemes or discriminatory price policies. With these schemes or policies they may restrict or distort competition either on the market where the dominant company itself operates (e.g. with discounts for exclusivity) or on the markets where its customers or suppliers operate. Namely, violations of competition protection regulations expose companies to severe sanctions. The Competition Protection Agency as the competent supervisory authority may punish a company committing the abuse of dominant position with a fine in the amount of up to 10% of company’s annual turnover in the previous business year, while the fine for the responsible person of the company may amount from 5,000 to 10,000 EUR (in certain cases this fine for responsible person can be increased up to 30,000 EUR). The abuse of dominant position can be also a criminal offence, which is subject to imprisonment from six months to five years, while also a legal person can be punished for such criminal offence (with a fine of at least 50,000 EUR or to a maximum amount of 200 times the damage caused or unlawful proceeds obtained from crime).
The persons or companies that suffer damage due to prohibited behaviour of the dominant company have the right to enforce claims for damage against the dominant company that committed the abuse. Thereby, the dominant company is exposed also to civil sanctions. Also taking into account the above, we advise companies great caution in formulating their pricing policies.