Second Conduct Rule: Abuse of Substantial Market Power

With power, comes responsibility

Being big is not bad, but businesses with substantial market power have a special responsibility  not to abuse their position to restrict or eliminate competition.

What is substantial market Power?

Substantial market power is the ability to act unilaterally without effective competitive  constraint.

For example, a business with substantial market power will be able to remain profitable while  engaging in the following behaviour:

  • •   Charging supra-competitive prices.
  • •   Reducing the quality of products.
  • •   Reducing the variety of products.
  • •   Lowering customer service standards.

In a competitive market, in face of an increase in price or deterioration in the quality of goods  or services offered, customers will bargain for a better deal, or switch to other suppliers.  However, businesses with substantial market power can reduce the attractiveness of their competitive offering without resulting in a significant loss of  business. This may be due to a number of reasons, for example the lack of countervailing buyer  power or a lack of close substitutes for the relevant product or service, or, the cost to customers  of switching is prohibitively high.

Under the Competition Ordinance, businesses with an annual turnover of HKD 40 million or less are  exempted from the application of the Second Conduct Rule.

What Constitutes abuse?

There is nothing wrong with achieving market power by being better, more efficient, and more  successful than the rest of the market.

Problems arise only when, having legitimately attained a position of substantial market power, a  business attempts to maintain that position in an evolving market, not by competing on merit, but by misusing its power to exclude competitors.

To illustrate, the following conduct may constitute exclusionary abuse of market power:

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