Ercüment Erdem Prof. Dr. H. Ercüment Erdem

Abuse Of Dominant Position Through Refusal To Supply

December 2013

Under Turkish competition law, undertakings, whether in a dominant position or not, are in principle not obliged to conclude contracts with other undertakings, in line with the principle of freedom of contract. In other words, any undertaking, whether dominant or not, should have the right to choose its trading partners and to dispose freely of its property. However, in some cases, undertakings in a dominant position are under the obligation to conclude contracts in opposition to the principle of freedom of contract. Under competition law, this obligation is referred to as the “essential facilities doctrine”.

The situations in which the “refusal to supply” or the “refusal to contract” may create an infringement of competition are examined in this article.

Definition of “Refusal to Supply”

Prohibition of use or procurement of products, services or any other undertaking’s material or immaterial components by an undertaking in a dominant position may be defined as “refusal to supply” or “refusal to contract”.

The Competition Board (“Board”) also qualifies the supply of high priced or low quality goods as the refusal to supply[1].

Legal Framework

The Act on the Protection of Competition No. 4054 (“Competition Act”) does not expressly state that the “refusal to supply” or the “refusal to contract” constitutes an infringement of competition. “Refusal to supply” or “refusal to contract” was first regulated under the Draft Guidelines on the Evaluation of Abusive Exclusionary Conduct of Dominant Undertakings (“Draft Guidelines”), which were opened to public opinion after being published on the official website of the Competition Authority on 18.07.2013. The Draft Guidelines have not yet entered into force.

Upon examination of Board decisions, it may be observed that refusal to supply may be considered, under certain conditions, as an abuse of dominant position[2]. It is even stated, in the Board decision dated 28.08.2012 and numbered 12-42/1257-409[3], that refusal to supply is not expressly regulated under the Competition Act, but qualifies as an infringement of competition in Board decisions.

Types of “Refusal to Supply

“Refusal to supply” or “refusal to contract” may appear either as an interruption of an existing contractual relationship or as a refusal to contract with potential customers. The refusal may be direct / indirect or conditional / unconditional[4].

Counterpart of the Contract Related to “Refusal of Supply”

“Refusal to supply” may be related to competitors or non-competitive clients in a downstream market.

Components of the “Refusal to Supply”

Competition law does not prohibit being in a dominant position, but the abuse of a dominant position. “Refusal to supply” may also constitute an abuse of dominant position under certain conditions.

The above-mentioned conditions are stated in the Board’s decision, dated 28.08.2012 and numbered 12-42/1257-409[5], and are as follows:

Objective Necessity of the Product or Service in the Downstream Market. An essential facility means the necessary usage of a product or infrastructure in order to enter into a market or to initiate an activity, as no other alternative exists or is granted.

As defined above, in cases where an input, facility or infrastructure owned by an undertaking in dominant position is essential to ensure effective competition on the downstream market and when it is not legally, technically or economically possible to find an alternative for this input, facility or infrastructure, an obligation to supply this input, facility or infrastructure to competitors in the downstream market is imposed on undertakings in a dominant position through the “essential facilities doctrine”.

Upon examination of Board decisions, it can be observed that the Board attentively examines the existence of an essential facility in each refusal to supply case in order to determine whether there is an abuse of dominant position.

The Board uses different criteria in order to determine whether there is an essential facility.

  • Alternative Source of Procurement. When evaluating the existence of an essential facility, the Board considers whether there is another current or potential alternative source for the undertaking. For instance, the Board, in its decision dated 28.08.2012 and numbered 12-42/1257-409[6], determined that the refusal to supply by Unilever San. ve Tic. A.Ş., which is in a dominant position in the industrial ice-cream market, does not constitute an abuse of dominant position, since various alternative sources exist in the relevant market. The Board also states, in its decision 03.01.2013 and numbered 13-01/3-3[7], that the alternative sources of procurement also include potential alternative sources of procurement.

Actually, the criterion pointed out here is the objective necessity of the essential facility. The Board, in its abovementioned decision, dated 03.01.2013 and numbered 13-01/3-3[8], defines the objective necessity of the essential facility as follows: “This does not mean that, without the refused input, no competitor could ever enter or survive on the downstream market. Rather, an input is indispensable where there is no actual or potential substitute on which competitors in the downstream market could rely so as to counter – at least in the long-term – the negative consequences of the refusal.”

The Board has quite narrowly interpreted alternative sources of procurement in its previous decisions. The Board, in its decision dated 04.01.2000 and numbered 00-1/2-2[9], evaluated four telephone operators consisting of Turkcell, Telsim, Aria and Aycell. The Board asserted that the fact that Turkcell and Telsim, which were dominant in the roaming market, did not permit Aria to profit from their roaming hindered Aria from directly entering the market and decided within this scope that Turkcell and Telsim had abused their dominant position. However, Aria and Aycell were obliged to provide 100% coverage through investments that they would make within five years as per the concession agreement. As seen above, the Board did not evaluate Aria’s investment as an alternative source of procurement.

While evaluating alternative sources of procurement, it is seen in the more recent decisions of the Board that the Board investigates the market with diligence and evaluates the alternative sources of procurement. For instance, the Board decided in its decision, dated 09.01.2003 and numbered 03-03/25-7[10], that a pier for RO-RO ships may be constructed by the private sector at a similar cost and within a similar period of time. Furthermore, the Board stated that there are a lot of piers owned by the private sector. Consequently, the Board decided that the piers used by TDİ in order for RO-RO ships to carry vehicles from one side of the Izmit Bay to the other are not of an essential facility for the companies willing to do the same business on the same line.

It would be better for the Board to clearly state its opinion on the alternative sources of procurement in the Draft Guidelines. Nevertheless, when the Draft Guide is examined it is seen that this topic is examined in general terms, the Board does not expressly state its opinion and there is no reference to a Board decision.

  • Possible and Rational Alternative Source of Procurement. The Board, while evaluating whether an essential facility exists, from the point of view of the undertaking to which the required good, service or input is not supplied, examines whether the procurement of the essential facility is possible and rational by other means. The Board, in its decision dated 02.08.2007 and numbered 07-63/777-283[11], stated that in order to enter into the newspaper and magazine editing market it is also required to enter into the downstream market, which is the distribution of newspapers and magazines. In order to enter into the newspaper and magazine distribution market, it is required to open around ten thousand selling points. Since the fulfillment of such start-up requirements is not possible and rational, the Board decided upon the fact that YAYSAT, BBD and BİRYAY, which were in a dominant position together, abused their dominant position by hindering enterprises willing to enter into the market from using the distribution networks (here the distribution networks constitute the essential facility).

The Board also stated in its decision, dated 09.01.2003 and numbered 03-03/25-7[12], that it is possible and rational to obtain an alternative source of procurement if obtaining such alternative source of procurement is not “extremely difficult”.

Elimination of Effective Competition in Downstream Market. Once the objective necessity of the input in the downstream market is established, it should be considered whether a dominant undertaking’s refusal to supply is liable to eliminate, immediately or over time, effective competition in the downstream market.

The term “downstream market” is used to refer to the market for which the refused input is needed in order to manufacture a product or provide a service.

The likelihood of effective competition being eliminated is generally greater the higher the market share of the dominant undertaking in the downstream market. The less capacity-constrained the dominant undertaking is relative to competitors in the downstream market, the closer the substitutability between the dominant undertaking’s output and that of its competitors in the downstream market, the greater the proportion of competitors in the downstream market that are affected, and the more likely it is that the demand that could be served by the foreclosed competitors would be diverted away from them to the advantage of the dominant undertaking.

Consumer Harm. In evaluating the likely impact of a refusal to supply on consumer welfare, it should be examined whether, for consumers, the likely negative consequences of the refusal to supply in the relevant market outweigh over time the negative consequences of imposing an obligation to supply. For instance, it is considered that consumer harm may arise where the competitors that the dominant undertaking forecloses are, as a result of the refusal, prevented from bringing innovative goods or services to market and/or where follow-on innovation is likely to be stifled. Similarly, it is also considered that a refusal to supply may lead to consumer harm where the price in the upstream input market is regulated, the price in the downstream market is not regulated and the dominant undertaking, by excluding competitors on the downstream market through a refusal to supply, is able to extract more profits in the unregulated downstream market than it would otherwise.

Efficiency Grounds. Even though the above-stated three conditions are fulfilled, the Board will consider the claims put forward by the dominant undertaking that its conduct is justified and if the Board considers that the claims of the dominant undertaking constitute efficiency grounds, the Board will not fine the dominant undertaking. The non-commercial credibility of the dominant undertaking, complete or temporary interruption of supply due to capacity limits or non-fulfillment of some safety requirement may be listed as efficiency grounds.

Conclusion

Since the refusal to supply brings an exception to the freedom of contract, it constitutes one of the most important subjects of competition law. Within this scope the conditions of such refusal should be determined in quite a detailed way.

The regulation of this subject under the Draft Guidelines was a good initiative. However, it would be more appropriate if the conditions of such refusal were explained in detail and references were made to Board decisions.



[1] Please see the Board decision dated 04.06.2013 and numbered 13-33/447-198, http://www.rekabet.gov.tr/File/?path=ROOT%2fDocuments%2fGerek%C3%A7eli+Kurul+Karar%C4%B1%2f13-33-447-198.pdf (accessed on: 03.01.2014) or the Board decision dated 10.09.2012 numbered 12-43/1322-435, http://www.rekabet.gov.tr/File/?path=ROOT%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar4976.pdf (accessed on: 03.01.2014).

[2] For exemple, see the Board decision dated 02.08.2007 and numbered 07-63/777-283, http://www.rekabet.gov.tr/File/?path=ROOT%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar2155.pdf (accessed on: 03.01.2014).

[4] Draft Guidelines, § 39.

[5] For detailed information on the decision, see. footnote 3

[6] For detailed information on the decision, see footnote 3

[7] For detailed information on the decision, see http://www.rekabet.gov.tr/File/?path=ROOT%2fDocuments%2fGerek%C3%A7eli+Kurul+Karar%C4%B1%2f13-01-3-3.pdf (accessed on: 03.01.2014).

[8] For detailed information on the decision, see footnote 9.

[10] To reach the decision, see http://www.rekabet.gov.tr/File/?path=ROOT%2fDocuments%2fGerek%25c3%25a7eli%2bKurul%2bKarar%25c4%25b1%2fkarar690.pdf (accessed on: 03.01.2014).

[12] For detailed information on the decision, see footnote 9.