An extract from The Dominance and Monopolies Review - 7th edition

Market definition and market power

There are two slightly different concepts of market power in German antitrust law. While the assessment of 'absolute' single or collective dominance typically requires a detailed market analysis (of market definition as well as of market power), the assessment of 'relative' market power focuses more on a comparison of market power between larger and small and medium-sized companies as trading partners or competitors. Generally, the FCO and the German courts continue to place considerable importance on market shares and have only slowly started to adopt the more sophisticated economic analyses used by the EU Commission.

i Market definition

In defining relevant product markets, the FCO primarily analyses the substitutability of goods and services from a demand-side perspective based on the intended use, characteristics and price of the relevant products. In some cases, the FCO also refers to the 'small but significant and non-transitory increase in price' test as an additional, but not the only or the principal, criterion for market definition. The concept of supply-side substitution (i.e., other manufacturers being able and willing to adjust their production within a short time and without significant cost) is also relevant under appropriate circumstances.

Demand-side substitutability is also the principal basis for defining the relevant geographic market. As under EU law, it comprises the area in which the enterprises concerned compete, in which the conditions of competition are sufficiently homogeneous, and that can be distinguished from neighbouring areas because of appreciably different competitive conditions.

In practice, ex post behavioural enforcement tends to take a somewhat narrower view on market definition than merger control, given that the perspective of specific customers or competitors potentially harmed by the conduct at issue can sometimes influence the assessment.

The German legislator has also clarified that a relevant market may be found even if the relevant services are rendered free of charge.

ii Dominance

As previously noted, German antitrust rules on unilateral conduct apply to companies in a position of single or joint dominance, and to companies enjoying 'relative' market power over small and medium-sized companies. Section 18 of the ARC defines single and collective dominance.

Single dominance

According to Section 18(1) of the ARC, single dominance exists if a company is without competitors, not exposed to significant competition or in a 'superior market position' as compared with its competitors (which can exist even if there is significant competition in the market). According to the FCO's merger control guidelines (the principles of which can also be applied in the antitrust area), single dominance exists where the market power of an enterprise enables it to act without sufficient constraints from its competitors (i.e., a situation in which an enterprise is able to act to an appreciable extent independently of its competitors, customers, suppliers and, ultimately, the final consumers).

Section 18(3) of the ARC lists the following criteria that may in particular be taken into account for the assessment of whether a company is in a 'superior market position':

  1. the enterprise's market share;
  2. its financial resources;
  3. its access to input supplies or downstream markets;
  4. its affiliations with or links to other enterprises;
  5. legal or factual barriers to market entry;
  6. actual or potential competition by domestic or foreign enterprises;
  7. its ability to shift its supply or demand to other products; and
  8. the ability of the enterprise's customers or suppliers to switch to other enterprises.

In practice, the FCO and the German courts tend to focus on whether an enterprise has sufficient market power to determine the most important business parameters. A somewhat static appraisal of market shares (both in absolute and relative – compared with competitors – terms) is still the most important factor. The rebuttable market share-based presumption pursuant to Section 18(4) of the ARC provides an important first indication of possible dominance where the market share of a company exceeds 40 per cent. While not impossible, it is often difficult in practice to rebut the presumption with economic arguments, especially in the case of high market shares substantially above the presumption threshold. This is notably because German law expressly stipulates that a dominant position can be based on a 'superior' market position, even if the company concerned faces significant competition from its rivals.

In line with the FCO's recent focus on digital markets, the German legislator has introduced additional criteria for the assessment of market power in multi-sided markets and networks. According to Section 18(3a) of the ARC, in particular, the following criteria must be taken into account when assessing a company's market position on multi-sided and network markets:

  1. direct and indirect network effects;
  2. the parallel use of more than one service and the difficulties faced by users in switching services;
  3. economies of scale in connection with network effects;
  4. the company's access to data relevant for competition; and
  5. competitive pressure driven by innovation.

The FCO applied these additional criteria in its decisions against German ticketing system operator, CTS Eventim, and Facebook. In CTS Eventim, the FCO found that the ticket platform enjoyed a dominant position with regard to event organisers and ticket offices in the two-sided platform market for ticketing services in Germany. In Facebook, the FCO based its dominance analysis on the German market for social media networks; in particular, on three factors:

  1. direct network effects resulting from Facebook's large number of users (creating a 'lock-in effect' for its users, as they would lose all their existing contacts if they switched to another social network – creating high entry barriers);
  2. indirect network effects that Facebook enjoys in relation to its advertisement customers (given the large number of Facebook users, advertisers cannot easily switch to another social network to reach as many users); and
  3. Facebook's access to users' personal data.

The new criteria will further play an important role in the FCO's ongoing proceedings against Amazon. The investigation focuses on Amazon's terms and conditions and its behaviour regarding the retailers on its German marketplace platform Reportedly, the FCO will pay particular attention to the indirect networking effects created by the role of Amazon's marketplace as an intermediary between resellers and consumers (the marketplace's benefit for retailers correlates directly with the number of customers using the platform and vice versa).

Collective dominance

According to Section 18(5) of the ARC, collective dominance exists where there is no substantial competition between the two or more largest companies in a market and where they jointly are not constrained sufficiently by competition from third parties. Pursuant to the FCO's merger control guidelines, collective dominance is defined as a few companies in an oligopolistic setting engaging in tacit coordination or collusion with the result that they effectively do not compete with each other.

Section 18(6) of the ARC also provides for market share-based legal presumptions for collective dominance. Thus, three or fewer companies are presumed to be collectively dominant if they have a market share of at least 50 per cent; and five or fewer companies are presumed to be collectively dominant if they have a market share of at least two-thirds. These presumptions are rebuttable, and the companies can show that substantial competition exists between them individually or that they are jointly sufficiently constrained by outsiders or customers.

The FCO and the German courts generally employ the criteria established by the EU General Court in Airtours v. Commission in determining collective dominance (albeit in a somewhat modified form). However, until a few years ago, there had not been a case where companies had been considered to be in a collective dominant position in the context of abuse proceedings.

In June 2015, the FCJ dealt with the first case in which a possible abuse of a collective dominant position was at issue. While the lower Stuttgart District Court found that the defendant, a public broadcasting company, did not hold a single dominant position, as it did not – by itself – have a superior market position compared with the private broadcasting companies, it found the defendant to have a collective dominant position together with the remaining public broadcasting companies, because there was no competition between the public broadcasters because of their strong commonality of interests, and all public broadcasting companies would – together – hold a superior market position compared with the private broadcasting companies. The Court found that public broadcasting companies had a 'must-carry status' as input providers for broadband cable providers, as turning to private broadcasters only was not a viable alternative. On appeal, the Stuttgart Court of Appeals left open whether the public broadcasting companies held a collective dominant position because it considered that there had not been an abuse in any event. The FCJ, upon further appeal, simply referred to the defendant's must-carry status, and thus considered it dominant on the market for input for cable television providers without elaborating on the distinction between single and joint dominance.

'Relative' dominance

As noted above, going beyond the scope of Article 102 of the TFEU, the ARC prohibits exclusionary (and discriminatory) conduct not only by companies that are dominant in 'absolute' terms, but also by companies on which 'small or medium-sized companies depend' as suppliers or purchasers of certain kinds of goods or commercial services, and by companies enjoying 'stronger market power in comparison to their small and medium-sized competitors'. The prohibitions aim at protecting small and medium-sized companies against anticompetitive conduct by their larger competitors or trading partners.

The prohibition on discrimination or unreasonable obstruction for 'relatively' dominant enterprises towards dependent companies is primarily designed to address buyer power in the (food) retail trade. Thus, Section 20(1) Second Sentence of the ARC establishes a presumption of dependency if a purchaser of goods frequently receives rebates or similar bonuses from its suppliers that go beyond customary rebates. The protection of small and medium-sized competitors against exclusionary conduct of competitors with 'stronger market power' is also principally targeted at retail markets (food, petrol, etc.). An example of prohibited exclusionary conduct is frequent pricing below cost. The ARC does not precisely define the concept of small and medium-sized companies that enjoy protection under these rules. The concept is generally understood to be turnover-related, but there are no specific turnover 'thresholds', and the amounts can differ from industry to industry.