Abuse of dominance occurs when a firm uses its dominant position in a market to lessen competition in that (or another) market.
The first step in any investigation of alleged abuse of dominance is to determine whether the firm in question has a dominant position, or significant market power, in the relevant market.
The second step is to consider whether the behaviour in question constitutes an abuse of the firm’s dominant position. Is the behaviour harmful to competition and to consumers? It is important to distinguish between aggressively competitive behaviour that harms individual competitors but benefits customers (for example by reducing prices), and behaviour that is anti-competitive.
Figure 1: Responding to Abuses of Dominance
A range of possible remedies exists. Which remedy is appropriate will depend on the specific nature and seriousness of the behaviour, and the likelihood that the firm may repeat the behaviour in the future.
Directive Remedies
Directive remedies, such as injunctions or bans, require the firm to:
- Cease its abusive behaviour, or
- Make specific changes to its behaviour so it is no longer damaging to competition.
Directive remedies may require ongoing monitoring, to ensure that the behavioural change is sustained.
Punitive Remedies
Punitive remedies include:
- Fining the firm,
- Ordering the firm to pay compensation to its competitors and/or customers,
- Fining company officers with direct responsibility for the behaviour.
Punitive remedies are intended to discourage abusive behaviour in the first place by making such behavior unprofitable. However, this objective must be weighed against the potential to “chill” dominant firms’ behaviour. If the cost of being found to have abused a dominant position is very high, then dominant firms will “err on the side of caution”. They may not engage in aggressively competitive behaviour, in case such behaviour is found to be anti-competitive.
Accounting Separation
Accounting separation aims to separate out the competitive and non-competitive parts of the firm’s business, without going to the extreme of full structural separation.
For example, this can be achieved by requiring the dominant firm to publish a set of regulatory accounts for the non-competitive part of its business. The objective is to make the costs of non-competitive services transparent so that regulators and others can more easily detect possible abuses. New Zealand used this approach as part of its “light handed” regulatory regime, prior to 2001. New Zealand's current regulatory regime also obliges the Commerce Commission to require the incumbent service provider to undertake accounting separation and to publish information related to its accounts.
Accounting separation is ex ante regulation—it is more concerned with preventing future anti-competitive behaviour than punishing past abuses.
Structural remedies
If the anti-competitive behavior is very damaging and there is a high probability of repetition, structural separation may be necessary. For example, this might involve breaking the firm into two competing firms with smaller individual market shares, or separating monopoly and competitive elements of the firm. A landmark example of structural separation is the United States break up of AT&T in 1984. In the United Kingdom, Ofcom announced that BT will restructure elements of its business to ensure equality of access to critical infrastructure.
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Abuse of Dominance