The Significant Market Power of the Committee on Protection of Competition

picture: Sean MacEntee

The Ministry of Economy finally published the eagerly-awaited plan for amendments to the Law on Protection of Competition (LPC). The newly proposed texts in the LPC are, for all points and purposes, a reaction to the ‘drama’ between the suppliers and the supermarket chains. It is no secret to anyone that the government feels compelled to solve this “problem” and legislation on competition is the shortest way for government (political) intervention into these relationships.

picture: Sean MacEntee

The focus of the proposed legislation on the supermarket chains is also evident from the preliminary review of its effects, which is entirely aimed at retail, and, respectively – at the relationship between the supermarket chains and the suppliers[1]. However, all of the proposed texts are general, i.e. they cover all economic units in the country and every single business settlement. In practice, using the “drama” with the supermarket chains as a leading argument, the government is proposing a new instrument, which is universal and affects everyone.

The key innovation is, of course, the introduction of the so called “abuse of significant market power”. Current legislation deals with two types of abuse – with a monopoly or a dominant position, both of which are relatively well defined and quite objective. A firm in a monopoly position, by definition in law, is one that has the exclusive right to carry out a certain activity, whereas a firm is in a dominant position when it is, in effect, independent from its competitors, suppliers or customers (due to its market share, resources, technological level, etc.). Significant market power, on the other hand, is by no means a small addition to current regulation, but rather a change that gives a whole new meaning to competition legislation in the country.

According to the proposed texts, a firm possesses significant market power when it is not in a dominant position, but still manages (again through the use of its market share, resources, technological level, etc.) to unilaterally dictate unfair terms to a supplier/customer who is dependent on the firm. This is where many questions arise, the answers of which will depend entirely on the whims of the Committee on Protection of Competition (CPC):

  • What does “unilaterally dictating unfair terms” mean? – Nothing demands the existence of a contract, i.e. to create one both sides need to agree on it and sign it. Everyone is in a position to dictate any terms he/she likes, including ultimatums, but is also in a position not to negotiate. When you walk into a restaurant, do you not run into unilaterally dictated terms – in the majority of cases the prices are fixed and it is up to you to decide whether to conclude a deal or not. If we follow the logic of the unilaterally dictated terms, then every contract can be put into question – one of the sides always can express disagreement and look for public/political protection against the “forced” terms. The fact is that if a deal exists, then both sides see the benefit from it.
  • What does “a dependent supplier/customer” mean? – This question is connected with the previous one. Obviously, the idea is that unilaterally dictating terms is only possible because the supplier or customer is dependent, i.e. cannot choose another business partner. This concept, however, is more than dubious – dependent by force or because of the circumstances? If you are obliged (by law) to sell your goods in a certain supermarket chain, then yes, you are dependent. But if you just wish to sell you goods in that chain, because it offers a bigger market and hence profits, then this is an entirely different story. Notice that here we are not talking about a monopolist or a firm in a dominant position – there is no such thing in the market in view. The manufacturer or supplier is dependent on the supermarkets only as much as he/she wants to benefit from their clients to sell his/her goods and make a profit.
  • What does “unfair trading terms” mean? – This is probably the most crucial question. Even if we accept that a certain dependent supplier/customer was coerced into signing a unilaterally established agreement, then who is to determine whether the terms of the agreement are fair or not? In no way does the new legislation change the reality (existing or not) of “unilateral terms” or “dependent suppliers”, it just grants the opportunity to use administrative (political) reasoning to determine if they are fair or not. Everyone who sets out on this path is destined to fail and, all too likely, to abuse her/his position. Here is a simple example of the methodological problems with fairness in a business practice – Is it fair to receive a free donut with your coffee? Let the administration answer this question in a coherent manner and define clear boundaries for what is fair and what is not. This will be quite amusing to read. This is the great thing about a market economy – there is no need for clerks to take on complex philosophical tasks (such as determining what fairness is), because people make these decisions daily. When it is not fair there is no deal, it is as simple as that.

I guess my thoughts on these three questions would cause serious discontent amongst some people and a lot of different points of view. What is more important is that the new additions to the LPC will grant the CPC the full authority to reason over these questions as they see fit. Since there is nothing on the subject in the law, the CPC will determine what fairness, dependence, etc. are.

What is even stranger is that the CPC can impose a temporary measure to stop a possible malpractice when it deems necessary or when one of the parties involved asks for it. In other words, the CPC can put a stop to a business practices for a certain amount of time without even having to determine whether significant market power, and respectively unfair business terms, are present. Such powers are basically the dream of every administrative unit – it itself to acquire “significant market power”, i.e. to unilaterally meddle in the business of dependent (before the law and the CPC) economic entities and prevent competition.

[1] The review itself is worth reading. Basically, the conclusion is that problems such as these (connected with unscrupulous business behavior) in Bulgaria cannot be resolved in any way, other than through legislation and administrative measures. The main reason for this lies in the “level of maturity of the market”.