Market dominance

According to Article 11 of the Competition Act, the abuse by one or more undertakings of a dominant position in a market is prohibited. The provision lists the following cases as possible examples of the abuse of a dominant position:

• that an unfair price, commercial term or trading condition is demanded,
• that restrictions are placed on production, markets or technological development which cause harm to consumers,
• business partners were treated differently with different terms in comparable transactions, thereby distorting competition,
• that it is a condition for entering into a contract that the contracting parties take on additional obligations not related to the subject matter of the contracts.

However, these instances are not an exhaustive list of the types of conduct that can constitute abuse of a dominant position. It can be said that most cases in this category concern so-called exclusionary abuses, which generally involve actions that cause harm to smaller competitors or are likely to drive them out of the market. This includes, among other things, the following conduct by dominant undertakings:

• Exclusive purchasing agreements – e.g. an undertaking by a dominant supplier that customers purchase a product or service exclusively from them.
• Loyalty terms – agreements on terms, e.g. a retrospectively paid discount, when a specified volume threshold is reached.
• Predatory undercutting – e.g. when a product or service is sold below certain cost benchmarks, usually variable costs.
• Targeted price reduction – a price reduction specifically aimed at competitors' customers, but which generally does not include the customers of the dominant firm. It is not a prerequisite that the pricing is below cost.
• Price discrimination – buyers are treated differently in comparable transactions without a cost advantage or other legitimate reason justifying the discrimination.
• Price pressure – For example, Company A is the market leader in the wholesale market but also operates in a related retail market. Company A sells an important input to Company B on the wholesale market, which is used to offer a product or service for sale on the retail market, where both Company A and B are competitors. The wholesale price that Company B must pay to Company A is so high that the price at which Company A offers its goods to its retail customers would not cover its costs if Company A's retail division had to pay the same wholesale price as Company B.
• Bundling – e.g. when a condition for the sale of product X is that product Y is also purchased, without any objective justification for the purchase of product Y, such as product Y being necessary for the functioning of product X.
• Refusal to sell – e.g. a supplier's refusal to do business with a particular retailer, which makes it almost impossible for the retailer to obtain the product or a comparable product from another source.

Another type of abuse of a dominant position is so-called exploitative abuses. It is different from exclusionary abuses mainly in that it is directed at customers or consumers rather than competitors. Examples of such abuse include excessive pricing or extortionate pricing. It can also involve unfair commercial terms.

The Competition Authority imposes fines on undertakings that breach Article 11 of the Competition Act, unless the infringement is considered minor or for other reasons it is not considered necessary to impose such fines in order to promote and strengthen effective competition. When assessing the amount of a fine, consideration is given to the nature and gravity of the infringements and their duration. The subjective state of mind of the owners or directors may also be relevant, as may the potential harmful effects of the infringement.

A dominant market position is not prohibited, but companies in such a position have a duty not to take any action that could distort normal competition. These duties are greater the stronger their position is. An infringement of the prohibition on the abuse of a dominant position does not require proof of harmful effects or an intention to distort competition. However, where such an intention exists, it can facilitate the proof of an infringement and make it likely that the penalties will be more severe.

The application of Article 11 of the Competition Act is controversial, as the provision can prohibit behaviour that is generally considered desirable, for example, a price reduction on a product. Furthermore, the question arises as to whether the purpose is to protect competition or competitors who may be operating inefficiently. There has therefore been discussion about placing greater emphasis on assessing the competitive effects of actions by dominant undertakings. However, to date, the approach in European law, from which Icelandic competition law takes its model, has been to rely on a conventional assessment, i.e. that it is not necessary to demonstrate the harmful effects of the actions.

In a nutshell

The abuse of a dominant position by one or more undertakings is prohibited, and a strict obligation rests on undertakings in such a position to do nothing that might distort normal competition. Competition law does not provide an exhaustive list of what constitutes unlawful conduct by dominant undertakings. However, most cases concerning the abuse of a dominant position concern agreements involving exclusive purchasing or supply clauses, undercutting,

It usually involves some cost and effort for a company to start operating in a new market. The obstacles that companies must overcome in order to operate in markets where they have not operated before are often referred to as barriers to entry. The academic definition of barriers to entry that many economists seem to agree on is attributed to George Stigler (1911–1991), who is associated with the so-called Chicago School of economics and received the Nobel Prize in Economics in 1982. Stigler's definition of barriers to entry was that they consisted of „the cost of production that firms wishing to enter a market must bear in excess of those firms already operating in the market.“ There are various other definitions of barriers to entry; for example, that a barrier to entry is anything that allows firms operating in a market to make unusually high profits from their operations without having to fear that new firms will enter the market. There is also the definition that a barrier to entry is anything that prevents a company from entering a new market when that entry would increase national economic welfare.

If there are no barriers to entry in a market, new companies are expected to enter and start operating in it as soon as profit opportunities arise. This has the consequence that such a market can be more efficient than markets that have barriers to entry. Various types of barriers to entry are a feature of many markets, and a significant amount of time for competition authorities around the world is spent trying to reduce, or remove, existing barriers to entry to increase their efficiency.

Three categories of access barriers

Competition authorities around the world generally look at three types of barriers to entry in their investigations, which are often divided into the following categories according to their nature:

1. Natural barriers to access
2. Barriers arising from laws and regulations
3. Barriers due to the behaviour of companies operating in the market

Natural barriers to entry include, for example, sunk costs. Sunk costs are considered to be those costs that cannot be recovered if a company that has started operations decides to cease trading. In industries where there are significant economies of scale, this fact alone can constitute a barrier to entry, as companies in most cases need to reach a certain minimum size in order to produce the relevant product cost-effectively.

Laws and regulations can, in many cases, contribute to positive externalities, e.g. the protection of the environment or the safeguarding of financial stability, but can also involve certain barriers to entry. For example, in many cases, companies need to have certain licences in order to be able to carry out their activities. If the number of licences is limited and they are not traded on a free market, it can be difficult for a new company to enter the market.

Finally, the behaviour of firms operating in the market can act as a barrier to entry. They can make it unattractive for new entrants to enter by, for example, investing in excess capacity. In some cases, they can also arrange matters so that it is not attractive for their customers to switch to another provider. An example of this is the use of so-called loyalty discounts.

Measures to reduce access barriers

When handling cases, the Competition Authority always considers the barriers to entry present in the specific market under review and seeks to assess whether these barriers can be reduced or removed. When barriers to entry stem from laws, regulations or actions by public authorities, the authority can advocate for these barriers to be reduced, for example by issuing opinions or by proposing changes to legislation. However, when the barriers stem from the behaviour of dominant firms operating in the market, the authority can investigate the matter further and take action where necessary.

Competition law states that a company has a dominant market position when it has the economic strength to prevent effective competition in the relevant market and can operate to a significant extent without having to take into account its competitors, customers and consumers.

The assessment of a dominant market position is carried out in two steps, namely the definition of the market in which the company in question operates and then an examination of the company's economic strength in that defined market.

When assessing a company's position in the market, the most important factors to consider are its market share in the relevant market and the market structure. Market share provides a very strong indication of a company's position in the market. A very high market share can in itself constitute proof that the company in question is a market leader, unless specific circumstances suggest otherwise. If the market share is higher than 50%, it is highly likely that the company is in a dominant market position. It is also important to compare the share of the company under assessment with that of other companies in the market. If there is a significant difference in market share between the company with the largest share and the next largest, it is likely that the former is dominant. It should be borne in mind that companies can also be in a dominant market position despite having a market share lower than 50% in the relevant market. Furthermore, in exceptional circumstances, companies may be considered dominant despite not having the largest share of the relevant market.

Market structure also matters when assessing a dominant market position, referring to factors such as barriers to entry (legal barriers and barriers related to the market's structure), financial strength, economies of scale, vertical integration, technological advantage, buyer power, supplier accessibility, developed sales channels and well-known brands.

It should be borne in mind that the concept of a dominant market position does not imply that there is no competition in the relevant market. A dominant market position can therefore exist despite lively competition in that market.

Joint dominant market position

In some cases, the situation can be such that two or more companies in the same market are considered to be in a so-called jointly dominant position. Such a position allows the companies concerned to coordinate their behaviour in the market without having to take competitors or consumers into account. The companies are therefore in a position to limit competition and increase prices or reduce services.

When assessing whether companies are jointly dominant, it is necessary to examine whether the relevant market is characterised by what has been termed tacit collusion. This refers to situations that enable companies to formulate a joint or coordinated market strategy and operate largely without taking competitors, customers or consumers into account. Indicators of this include, among others:

• High market concentration and a similar market share for the companies that share a collective dominant position.
• Economic and formal links between the companies.
• A transparent market and homogeneous products.
• Constant demand and a similar cost structure for the companies.
• Barriers to access.

It is not a requirement for a joint dominant market position that all the conditions are met. The companies do not necessarily have to formulate a joint market strategy by consulting with each other; it is sufficient for it to arise from their tacit coordination. This means that the companies take mutual consideration of one another and can therefore know with a certain degree of certainty what competitors' reactions will be to specific market actions. The companies therefore lack the necessary competitive restraint, but market conditions lead to them adopting coordinated behaviour, e.g. by limiting the supply of a product or service in order to increase the selling price, with the aim that coordinated market behaviour will maximise their joint profits.

Undercutting is when a company sells a product or service below a certain cost threshold. Generally, this refers to a price below the average variable cost. Undercutting can be against competition law if the company in question is a dominant firm. Such conduct can potentially create or maintain barriers to entry and thus have detrimental effects on competition.

In assessing whether undercutting constitutes a breach of competition law, it is therefore first necessary to determine whether the company in question was in a dominant position at the time the undercutting took place. If so, the extent of the undercutting and the length of time it has lasted must be considered. Undercutting can constitute an infringement of competition law when a dominant undertaking sells a product or service below cost price continuously for a certain period with the aim of strengthening its dominant position and even to push out a competitor(about) its competitors out of the market or to prevent the entry of new competitors.

Regulations designed to combat predatory pricing are based on the principle that it is undesirable for a dominant market player to use its financial strength to sell a product at an unreasonably low price in order to destroy competition. Although consumers may benefit in the short term from receiving the relevant product at a very low price due to predatory pricing, it is believed that the disruption to competition resulting from this practice leads, in the long term, to higher prices, lower quality, and a reduction in consumer choice. Thus, the consequences of a dominant firm's predatory pricing can be that weaker competitors see no reason to compete. Furthermore, it is clear that the incentive to challenge a dominant firm will be reduced if it is free to respond to competition by selling its product below cost. Finally, a consequence of undercutting can be that competitors are forced out of business.

Theoretically, there are certain instances where undervaluation by a dominant undertaking does not constitute a breach of competition law. It is generally incumbent upon the company concerned to provide convincing, objective justification for this. For example, the sale of stock approaching or just past its sell-by date, or promotional offers on new products, can be possible justifications for undercutting.

In several instances, the competition authorities have had to take action due to harmful undercutting by dominant undertakings:

In Decision No. 64/2008, the Competition Authority found that Hagar (which operates the Bónus chain of stores, among others) had abused its dominant market position through actions directed at its competitors in the food market. In doing so, they broke competition law. Hagar's infringement consisted of the undercutting the company engaged in during 2005 and 2006. Hagar sold milk below cost price in its Bónus stores for a long period. The dairy products were sold at a substantial loss, which resulted in the Bonus stores as a whole operating at a loss. The Competition Authority considered that the infringement was capable of causing significant competitive harm to business and the public. The Appeal Board reached the same conclusion in Decision No. 2/2009. The District Court upheld the decision with judgment no. E-7649/2009, which was subsequently confirmed by Supreme Court judgment no. 188/2010.

In Supreme Court judgment no. 205/2011, the Supreme Court confirmed that Icelandair had abused its dominant market position on the flight route between Keflavik and Copenhagen. Icelandair was fined 80 million króna. The ruling is precedent-setting as it confirms that a dominant player in passenger air travel must be careful not to restrict market access through the promotion and pricing of airfares.

In Decision No. 30/2012, the Competition Authority concluded that Síminn had abused its dominant market position with an offer made to its customers in the summer of 2009. The offer was for a 3G dongle and a subscription for 0 kr. for the entire summer. Síminn was ordered to pay a 60 million kr. administrative fine. The Competition Authority considered that the offer constituted illegal below-cost pricing. Síminn appealed the Competition Authority's decision to the Competition Appeals Board, which concluded, in ruling no. 10/2011, that Síminn held a significant dominant position when considering the telecommunications market as a whole. This dominance made it particularly urgent to prevent Tælon from using its dominance in traditional telecommunications markets to establish the same dominance in new, developing telecommunications markets.