Misuse by Lyfja and Heilsa Ltd. of its dominant market position

In a decision published today, the Competition Authority has concluded that Lyf og heilsa hf. (L&h) abused its dominant market position by taking actions aimed at preventing a new competitor in pharmacy in Akranes from establishing a foothold in the market. The actions were intended to send a clear message to other parties that it would not be worthwhile to try to compete with L&h. The Competition Authority considers the infringements to have been serious and imposes a fine on L&h of 130 million króna.

The background to the case is that in the summer of 2007, a new pharmacy in Akranes, Apótek Vesturlands (AV), began competing with the L&h-owned pharmacy that was already established in the area. Subsequently, the Competition Authority received a tip-off that L&h had taken steps to prevent AV from establishing itself in Akranes. The Competition Authority decided to investigate the matter and conducted a search at L&h on 14 September 2007. The investigation has been extensive, and the collection of evidence concluded in November 2009.

1. Dominant market position
During the proceedings, L&h has categorically rejected that the company was dominant in the market. The Competition Authority therefore had to consider this issue, define the relevant markets in the case and assess the position of the companies within them. The decision contains a detailed analysis of the market for retail pharmaceuticals, both in the capital region and in Akranes.

In 2006, the Competition Authority annulled the merger between L&h's sister company (DAC ehf.) and Lyfjaver, which is a competitor of L&h. In that case, it was found that L&H and Lyfja were in a jointly dominant position in the capital region and that the merger had strengthened this joint dominant position. The Competition Appeals Board upheld the decision. A jointly dominant position essentially means that the companies concerned can coordinate their behaviour in the market without having to take competitors or consumers into account. The companies are thus in a position to limit competition and raise prices. In light of L&h's objections, this case required an investigation into whether this situation still existed.

Evidence obtained during the search of L&H's premises confirms this. It was established that L&H's clear policy was not to compete on price with Lyfja, either on over-the-counter medicines or prescription medicines. A senior L&h manager put it this way in an email: „Regarding the prices in the pharmacies in general, L&h is not in a price competition with its competitors.“ The data shows that the decision on drug pricing was set so that it was higher than the price of the same drugs at Lyfju. This is clear confirmation of the existence of a joint dominant market position and a lack of competition between the major pharmacy chains.

L&H are also considered to be in a dominant market position in Akranes. In this regard, consideration was given, among other things, to their financial superiority over the new competitor and their strong position in related markets, particularly the capital region.

2. The Broken
The evidence shows that L&h became aware at the end of 2006 that a new pharmacy was planned to open in Akranes, whereas at that time L&h operated the only pharmacy there. It is clear that L&H had a clear intention to prevent this new competition, inter alia, by the following actions:
• Representatives of L&h contacted the pharmacist who was working on establishing AV and tried to persuade him to abandon the opening of a pharmacy in Akranes and instead become an employee of L&h. The pharmacist rejected this offer.
• Within L&h, there was talk of being the first to open another pharmacy in Akranes (a low-cost pharmacy). It was said that this would „completely shut out any other competition here“.
• L&H took action against Haga, the owner of Bónus, who was in the same premises where AV had secured a sales space, in order to prevent the new competitor from entering the market.
• In dealings with the Ministry of Health and Insurance, L&h opposed AV obtaining a pharmacy licence.

These measures were not enough to prevent AV from starting operations, and L&h then took marketing action against its competitor. These consisted, on the one hand, of establishing a so-called loyalty club, intended to ensure that key customers would not start doing business with AV. The other measure, however, consisted of what L&h called „battle discounts“. These were substantial discounts on key medicines, available exclusively in Akranes. The extent of these discounts was determined with regard to the financial position of AV, whom L&h considered a weak competitor. The purpose of these measures was to drive the new competitor out of the market. In this context, the managing director of L&h believed in an email that AV „will definitely not be able to stand this for long.“ In another email from the managing director to the owners of L&h, sent on 7 July 2007, the representative of AV and measures against this new competitor were discussed, and it states, among other things:

„I find it unlikely he has the stamina for long given these conditions, but ideally I'd like to see his prescription count drop below 30%; then it's definitely over. He'll probably take a pay cut at some point, but that won't work in the long run.“

The Competition Authority concludes that the market practices in question constituted a serious infringement of competition law, as they involved an organised attack on a new competitor that was expressly aimed at distorting competition. The Competition Authority finds that L&h has both abused its dominant market position in Akranes and its jointly dominant market position in the capital region. The actions were intended to send a clear message to other parties that it would not be worthwhile to try to compete with L&H. They were thus designed to protect and strengthen L&H's position in the market.

L&h failed to push this competitor out of the market. The Competition Authority's decision addresses this and notes that L&h changed its behaviour after the search on 17 September 2007. Is it considered highly likely that L&H would have succeeded in driving AV out of the market if the company had believed it had the room to manoeuvre to continue exploiting its economic superiority over this competitor?.

The Competition Authority considers the infringements to have been serious and imposes a fine of 130 million króna on L&h.