Abuse of Relative Dominance by Digital Platforms: A Law and Economics Perspective

Abstract

In the age of AI, digital platforms are likely to hold significant market power, giving them a superior bargaining position over their business partners and enabling them to impose unfair trading terms. However, proving that a platform holds a dominant position under Art. 102 of the Treaty on the Functioning of the European Union (TFEU) is challenging. The multi-sided nature of platforms complicates the definition of the relevant market, and their innovative digital business models makes it difficult to assess lasting market power. This could lead to false negatives, resulting in under-enforcement from an economic perspective. To address this market reality, the Digital Markets Act (DMA) has been adopted as an ex ante instrument to, inter alia, complement competition law enforcement. However, since the DMA’s quantitative thresholds remain high, numerous platforms with superior market power vis-à-vis their trading partners may not qualify as ‘gatekeepers’, leaving the risk of under-enforcement unresolved. This article explores the desirability of introducing a prohibition on ‘abuse of relative dominance’, drawing on this long-standing concept in some EU Member States. Such a measure could help tackle the concerns arising from the superior bargaining position of digital platforms.

I. Introduction

With the progression of digitization and the growth of new business models, digital platforms are likely to hold significant market positions due to the characteristics of digital platforms, including multi-sidedness, network effects, economies of scale and lock-in effects.¹ This enables those undertakings to gain and maintain a superior bargaining position over their business partners. It is worth remembering that holding superior bargaining power or even a dominant market position is not an offence. Nevertheless, digital platforms are likely to abuse their strong market power to impose unfair trading conditions on their business partners while seeking to maximize profits. However, it may be difficult to prove that they have a dominant position within the meaning of Art. 102 TFEU. On 1 August 2024, the European Commission released the ‘Draft Guidelines on the application of Art. 102 TFEU to abusive exclusionary conduct by dominant undertakings’, which outline its stance on exclusionary abuse.² These guidelines establish a presumption that certain types of conduct constitute exclusionary abuse, thereby shifting the burden of proof onto dominant firms in an effort to strengthen enforcement. However, applying this assumption still necessitates defining the relevant market and determining dominance, which does little to improve the existing problematic situation.³ Moreover, even when they are not dominant within the meaning of that article, dominant firms may still be strong enough compared to the undertakings seeking access to the platform to impose unfair trading conditions on the latter. Therefore, the research question in this paper is whether it is desirable to introduce a prohibition on abuse of relative dominance to address concerns caused by superior bargaining positions held by digital platforms.

In order to address that question, this paper will first recap the characteristics of digital platforms and the nature of digital business models contributing to market power in the form of superior bargaining positions in digital markets. Next, this paper will evaluate whether the current EU legal system can effectively tackle concerns caused by strong market power, especially in the form of superior bargaining positions in digital markets. This paper will go on to discuss the desirability of introducing rules on relative dominance from a legal and economics perspective. Reference will be made to national laws on relative dominance in certain EU Member States when addressing concerns caused by superior bargaining positions in digital markets. A conclusion will sum up this paper and answer the main research question.

II. Characteristics of digital platforms and the nature of digital business models

Certain characteristics of digital platforms present challenges when assessing a dominant market position. The nature of digital business models also adds to the complexity of tackling concerns caused by durable market power. This section will recap the characteristics of digital platforms and digital business models, so as to observe their relationship with market power and determine the need to regulate relatively dominant market positions.

1. Characteristics of digital platforms

Digital platforms leverage information technology and data to offer a range of services to third parties, creating multi-sided markets that cater to different user segments. Multi-sided digital markets are often subject to network effects, which ‘occur when the value of a service to its users increases as the total number of users increases’.⁴ Network effects can be distinguished into direct network effects (i.e. ‘the value of a product/service increases as the number of its users increases – same-side effects’), and indirect network effects (i.e. ‘the value of the product/service increases for one user group when a new user of another user group joins the network – cross-side effects’).⁵ Network effects are frequently observed in multi-sided platform environments, though they are not exclusive to them. For instance, a social media platform designed for communicating with friends becomes more valuable as more users join and use it (i.e. direct network effects). In the case of online search engines, an increase in users on one side of the platform boosts its value to advertisers, leading to additional investments in the platform (i.e. indirect network effects). This, in turn, draws more users to the user side, which thereby enhances network effects. In this vein, strong network effects are likely to reinforce the market position of incumbent undertakings, lock in consumers and hinder new entrants from establishing a presence in the market. In particular, the market power of incumbent undertakings may be amplified if consumers encounter high switching costs or if multi-homing is not feasible.

‘Economies of scale resulting from low or zero marginal costs can add to the impact of network effects, providing incumbents with a significant advantage and discouraging entry’.⁶ Economies of scale take place where average costs decline as scale increases, meaning that once a platform undertaking grows to a certain scale it becomes challenging for smaller new entrants to compete effectively in a given market.⁷ Digital products and services often incur substantial fixed costs for product development, while having minimal or zero variable costs, as accommodating an additional user typically entails hardly any extra expense. In practice, the substantial fixed costs and the associated economies of scale have been acknowledged in several competition authority decisions within digital markets, for instance, the EU Google Shopping case.⁸ Furthermore, mergers and, in particular, killer acquisitions, taking over new competitors in order to reduce competition, may take place.⁹ As such, economies of scale can result in monopolization and oligopolization.¹⁰

In the meantime, many digital markets demonstrate strong economies of scope, enabling incumbent undertakings to effortlessly expand into a related market, which in turn protects their position in their original market, especially in the digital ‘ecosystem’ context where products/services are interconnected.¹¹ On the supply side, economies of scope enable the sharing of ‘data, expertise, digital infrastructure, and established sales channels across different digital products’, whereas, on the demand side, they offer consumers a seamless ‘one-stop shop’ to meet a variety of needs.¹² In this sense, potential competitors who cannot reproduce these economies of scope may encounter challenges in competing in either market.¹³ More specifically, the influence or control the undertaking has in one market could be leveraged to bolster its position or gain an edge in a related or adjacent market. Notably, favorable access to data and consumers granted by platform undertakings in one market may amount to a substantial competitive advantage in the new market. Moreover, the linkage of products in the digital ‘ecosystems’ can protect a platform undertaking’s market power in its original market. In particular, the bundling of digital products may create significant entry barriers for new entrants. To effectively compete with established undertakings they might need to offer the full range of bundled products, which might not be feasible.¹⁴ For instance, in its Google AdSense case, the European Commission held that competitors could not challenge Google’s dominance in online search advertising as doing so would necessitate creating a competing search engine with comparable reach and performance.¹⁵

As data has become a key input in numerous products and services, gathering and processing data to enhance the quality of these offerings is now a prominent aspect of digital business models. The capacity to access and use data has emerged as a significant competitive parameter and may be a prerequisite for entering certain digital markets. Specifically, if the capacity to collect or process data is essential for undertakings to enter into a relevant market, a lack of data can pose a significant barrier to market entry. If an established undertaking holds a substantial ‘data advantage’ that new competitors cannot replicate ‒ whether through data ownership, access, or the ability to collect and analyze data – that can reinforce or entrench the market power of that undertaking.¹⁶ For instance, in the Google Android case, the European Commission held that Google’s conduct prevents its competitors from obtaining valuable user data linked to search queries, which ‘increases barriers to entry’ and thereby ‘maintains and strengthens its dominant position’.¹⁷

Therefore the concentration of data can hinder market access for potential competitors and thereby impede effective competition. In terms of the impact on consumers, the accumulation and concentration of data can enhance the expansion of service and improve service quality, which, on the one hand, increases utility for consumers but, on the other hand, imposes high switching costs on them and thereby creates lock-in effects.¹⁸

Arguably, economies of scale and scope, along with network effects, provide consumers with considerable advantages. However, when market power appears to be dominant and the positions of incumbent undertakings remain unchallenged, these benefits and the economic potential of digital markets tend to be constrained or diminished.¹⁹ Especially if market power is strong enough, these characteristics of digital platforms may lead to a market becoming susceptible to being dominated by a single and enduring undertaking.²⁰ In other words, a digital platform is very likely to secure a dominant position in the market, or at least a relatively dominant position, granting it a superior bargaining position toward business partners and enabling it to impose unfair conditions on trading parties lacking countervailing power.

2. Nature of digital business models

The nature of business models may lead to market power that is detrimental to competitors and consumers. Firstly, digital markets often exhibit a certain level of vertical integration and may exclude competition.²¹ For instance, when a digital platform undertaking offers its own products and services on its own platform, it can set the conditions for using its platform and compete with undertakings that engage in economic activities on its platform. In this sense, a digital platform acts as both the ‘gatekeeper’ and a participant on its own platform. This may raise concerns about the denial of access to its platform for competitors (refusal to supply), or the granting of favourable access to the downstream operations of a vertically integrated undertaking (margin squeeze or self-preferencing).²²

Secondly, digital platforms frequently operate across numerous interconnected markets, fostering the emergence of product ecosystems and the development of diversified business models. For instance, in conglomerate business models, an undertaking may employ strategies, such as tying and bundling (offering products together or providing bundle discounts), to acquire market power in a new market while reinforcing its position in its original market.²³ From the perspective of competitive constraints caused by the competing sellers operating on the platform, the ecosystem’s core service provider may protect itself from competitors offering standalone products by tying and bundling products together. Meanwhile, excluding competitors that offer complementary products can be a tactic to prevent challengers from gaining the necessary size, scale, and data to compete with the incumbent’s core business.²⁴ This may contribute to the lock-in effects on consumers and increase their switching costs.

III. Current legal regimes to tackle concerns caused by strong market power

This section will evaluate whether the current EU legal system that include both ex ante and ex post instruments can effectively tackle the concerns caused by strong market power, especially in the form of superior bargaining positions by digital platforms. Since the most traditional approach to tackle strong market power is the competition law theory of ‘abuse of dominance’, it makes sense to start the discussion from Art. 102 TFEU, an ex post remedy, under competition law.

1. Ex post enforcement: Abuse of dominance in competition law

Article 102 TFEU states that any abuse by one or more undertakings of a dominant position within the internal market, or in a substantial part thereof, is prohibited insofar as it may (substantially) affect trade between the Member States. If a digital platform undertaking holding a dominant position engages in a practice which excludes or restricts competition, this may trigger competition concerns and thereby fall within the scope of Art. 102 TFEU.

The establishment of dominance lies at the heart of Art. 102 TFEU. As an economic phenomenon, market dominance reflects the relationship between undertakings and market competition,²⁵ which empowers undertakings to set prices or make business decisions without considering reactions from competitors or customers.²⁶ A dominant position always exists in relation to a market, which implies that the relevant market in which the undertaking competes needs to be determined.²⁷

Market definition is a tool for identifying and defining ‘the boundaries of competition’ between undertakings.²⁸ In general, a relevant market has two dimensions: the product market and the geographic market. The relevant market is defined to encompass all those products or services that are considered effective substitutes for the products and services in question.²⁹ Undertakings face three primary sources of ‘competitive constraints: demand substitutability, supply substitutability and potential competition’.³⁰ From an economic perspective, demand substitution is the most direct and effective competitive constraint on suppliers of a given product when defining the relevant market.³¹ The assessment of demand substitution involves identifying the ‘range of products that considered by consumers to be substitutes’.³² Supply-side substitutability can be considered in cases where its impact is comparable to that of demand substitution in terms of ‘effectiveness and immediacy’.³³ Supply-side substitution occurs when suppliers can shift production to the relevant products and market them in the short term, without facing significant additional costs or risks, in response to small and permanent changes in relative prices.³⁴

The market definition has a decisive influence on the assessment of dominance.³⁵ The larger the relevant market the lower the chance that an undertaking can obtain a dominant position. It is therefore of great importance to identify the interchangeability which exists between products and regions systematically and reasonably, irrespective of whether the market concerned is traditional or digital. However, the flourishing of the digital economy brings new challenges when defining the relevant market, taking into account the new characteristics of the digital market and the nature of digital business models in the digital era. The market definition emphasizes formalistic standards, which may be challenging to perform, particularly in digital markets where information is often limited. This is due to factors such as complex ecosystems (e.g., products centred around a mobile operating system like app stores) with interconnected products and services, pricing at zero, and an exceptionally swift rate of change. For example, characteristics such as multi-sidedness add difficulties when setting a clear market definition, which can be demonstrated in advertising-sponsored platforms as found in the Microsoft/LinkedIn case in the EU.³⁶

Notably, the definition of the relevant market is merely an intermediate step that facilitates the assessment of competition and market impact.³⁷ Under competition law, abuse is only condemned in the presence of a dominant position.³⁸ As defined in Hoffmann-La Roche, an undertaking is dominant when it is ‘in a position to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers’.³⁹

‘The existence of a dominant position arises in general from a combination of several factors which, taken separately, are not necessarily determinative’.⁴⁰

The assessment of market dominance includes an assessment of market shares but also takes into account other important indicators, such as barriers to entry, countervailing buyer power and product differentiation.⁴¹ This approach can provide clues to the digital economy as well and has been adopted in the Commission’s 2024 Market Definition Notice.⁴²

Market shares of competitors in the relevant market serve as an indicator of their relative market power.⁴³ Indeed, market shares offer an initial filter for determining whether a more detailed assessment of competition is required.⁴⁴ Since competition is a dynamic process, evaluating the competitive constraints on undertakings cannot solely rely on the current market conditions.⁴⁵ The constraint posed by the entry, or just the potential entry, of other undertakings can in certain circumstances prevent undertakings that enjoy very high market shares from exercising market power.⁴⁶

Moreover, competitive constraints can be imposed not only ‘by actual or potential competitors but also by customers’.⁴⁷ Countervailing buyer power is often thought of as being about the size of the buyer, with the idea being that large buyers can exercise buyer power.⁴⁸ More specifically, when a buyer has other alternative options to switch to if an undertaking raises the price to that buyer, that undertaking may not be able to exert its market power over the buyer. In addition to customers’ size, countervailing buyer power can arise from customers’ commercial importance for the dominant undertakings, enabling them to promote new entry, pursue vertical integration, or credibly threaten to do so.⁴⁹ It is worth noting that even an undertaking with a high market share may not be able to act significantly independently if its customers possess sufficient bargaining power.⁵⁰

The rapid increase of technological innovation, the support of modern financial tools and network effects have helped platform operators to develop quickly and has led to a higher market concentration rate in the industry.⁵¹ This adds to the difficulty of proving that a platform undertaking holds a dominant position within the meaning of Art. 102 TFEU. Moreover, the multi-sidedness of platforms makes it difficult to determine the relevant market. Furthermore, digital business models are subject to innovative competition, which adds to the complexity by making it difficult to determine durable market power. From an economic perspective, this may lead to false negatives. False negatives or type II errors occur when harmful practices go unsanctioned.

2. Ex ante regulation: Gatekeepers under the DMA

To regulate the rapidly growing market power of undertakings in digital markets, economists have proposed various definitions of gatekeepers in digital markets. Caffara and Scott Morton define a gatekeeper as ‘an intermediary who essentially controls access to critical constituencies on either side of a platform that cannot be reached otherwise, and as a result, can engage in conduct and impose rules that counterparties cannot avoid’.⁵² As the definition suggests, in the context of digital platforms, gatekeeper power features certain elements of market power. The extent of market power is influenced by the motivation and ability of groups to multi-home or switch to other platforms, increasing as the proportion of users who rely solely on a single platform rises.⁵³

Peter Alexiadis and Alexandre de Streel identify two types of scenarios: (1) ‘the gatekeeper controls access by third-party firms to its users’ (e.g. an online social network such as Facebook, that exercises a certain level of control over access to its users by online advertisers); and (2) ‘the gatekeeper controls access to content, products and/or services’ (e.g. a search engine such as Google Search, that utilizes its ranking algorithm to controls the access of users to Web content).⁵⁴ Given that ‘not all harms to individuals are captured by the ex post competition law enforcement’ or even ‘visible from a purely economic perspective’, Lynskey argues for a more expansive definition of a gatekeeper as ‘an undertaking which controls the flow and accessibility of information and structures the digital environment’.⁵⁵

Building on the gatekeeper concept developed by economists, the EU legislator adopted the Digital Markets Act (the DMA) on 14 September 2022 as a legal response to market realities, following the European Commission’s initial proposal on 15 December 2020.⁵⁶ The DMA entered into force on 1 November 2022 and became applicable on 2 May 2023. The DMA lays down harmonized rules to ensure contestable and fair markets in the digital sector across the EU where gatekeepers are present.⁵⁷ The DMA targets online intermediary services and large online platforms qualified as ‘gatekeepers’ to safeguard innovation, growth, and competitiveness in digital markets. Aimed at complementing the application of competition law, the DMA is without prejudice to the application of Art. 102 TFEU.⁵⁸ In other words, the DMA has been introduced as an ex ante instrument to, inter alia, address the unsolved problem left by competition law.

According to Art. 3 DMA, gatekeepers are undertakings that (1) have a significant impact on the internal market, (2) provide core platform services which serve as an important gateway for business users to reach their customers and (3) enjoy an entrenched and durable market position in their operations. The assessment of gatekeeper status is related to market power, but market definition, dominance determination and competition impact assessment are no longer required. In other words, an undertaking does not need to be dominant within the meaning of competition law to qualify as a gatekeeper under the DMA.

Article 3(2) DMA lays down quantitative thresholds to designate an undertaking providing one of the core platform services listed in the DMA as a gatekeeper. It is required that the undertaking (a) ‘achieves an annual Union turnover equal to or above EUR 7.5 billion in each of the last three financial years, or (…) its average market capitalisation or its equivalent fair market value amounted to at least EUR 75 billion in the last financial year, and it provides the same core platform service in at least three Member States’, (b) ‘it provides a core platform service that in the last financial year has at least 45 million monthly active end users established or located in the Union and at least 10,000 yearly active business users established in the Union, identified and calculated in accordance with the methodology and indicators set out in the Annex’; and (c) ‘the thresholds in point (b) (…) were met in each of the last three financial years’.

However, the quantitative thresholds based on size are still too high to capture all suspicious platforms, especially considering conglomerate effects. Moreover, the quantitative thresholds have to be met during the previous financial year, which prevents rapid intervention against fast-growing market players in dynamic digital markets. Consequently, it is likely that numerous undertakings holding superior market power vis-à-vis their trading partners do not meet the criteria of ‘gatekeepers’ and continue to impose unfair conditions on trading parties in digital markets.

IV. The desirability of introducing rules on relative dominance

In order to address the unsolved concerns caused by strong market power, this section will discuss the desirability of introducing rules on relative dominance from a legal and economics perspective. When addressing concerns caused by superior bargaining positions in digital markets, reference will be made to national laws on relative dominance in a number of EU Member States.

1. The necessity to reduce the risk of false negatives

In economics, error costs may ‘occur when practices that do not harm economic welfare are falsely prohibited (type I errors/false positives) or harmful practices are allowed (type II errors/false negatives)’.⁵⁹ More specifically, false positives refers to situations where decisions deem exclusionary conduct by a monopolist as unlawful, even though it should not be considered so under the law.⁶⁰ This type of error may lead to unpredictable enforcement of competition law, which induces excessive caution and discourages innovation in undertakings when engaging in economic activities, and thereby deters vigorous competition by creating a chilling effect.⁶¹ To address concerns caused by strong market power in the digital market, the prevailing economic-effects based approach under competition law contributes to reducing the risks of false positives in the enforcement of rules on abuse of dominance via the ex post assessment model.

In contrast, false negatives (or type II errors) occur when harmful practices are unsanctioned. In other words, false negatives refer to decisions that fail to find violations where the conduct unjustifiably and unnecessarily excludes either new or existing competition.⁶² A decision with this type of error will encourage other dominant undertakings to employ the same approach. As a result, the approval of the conduct at issue provides the dominant undertaking and its competitors with an extra tactic to eliminate competition, which raises the likelihood of unnecessary exclusion, reinforces the market leader’s dominance, and extends the exploitation of consumers.

As noted in section III.1., it seems quite challenging to define the relevant market in digital markets, especially taking into account the multi-sidedness of platforms. Beyond that, digital business models are subject to innovative competition and dynamic changes. This adds to the complexity of determining the durable market power in the digital era. Consequently, this may lead to the risk of false negatives from an economic perspective. As discussed in section III.2., the ex ante instrument of the DMA lays down objective quantitative thresholds, which tend to be restrictive when designating rapidly growing market players as gatekeepers in dynamic digital markets. As a result, it is likely that numerous undertakings holding superior market power vis-à-vis their trading partners do not meet the criteria of ‘gatekeepers’ and continue to impose unfair conditions on trading parties in digital markets. In this regard, the false negatives in the form of under-enforcement have not been fully addressed.

2. National laws on relative dominance in certain EU Member States

In certain EU Member States this problem can be remedied by using the concepts of ‘relative market power’, ‘superior market power’ or ‘economic dependency’. The established doctrine of ‘relative market power’ in German competition law, also adopted by several Member States like France, is used to restrict undertakings from exploiting unlimited commercial freedom in scenarios where their customers lack viable alternatives for supplying or purchasing other products or services in the market.⁶³

Section 20 German Competition Act explicitly prohibits abusive conduct of undertakings (and associations of undertakings) with relative or superior market power over other undertakings, when other undertakings, as buyers or sellers of specific goods or services, ‘are dependent on them in such a way that sufficient and reasonable possibilities for switching to third parties do not exist and there is a significant imbalance between the power of those undertakings or associations of undertakings and the countervailing power of other undertakings’. The idea behind the application of this principle is that the dependent customer (or provider) has ‘insufficient and unacceptable means of switching to other providers (or customers)’.⁶⁴

Similarly, Art. IV.2/1 Belgian Code of Economic law prohibits abuse of a position of economic dependence in which one or more undertakings find themselves, as a result of which competition may be impaired in the Belgian market concerned or in a substantial part thereof. For the application of this provision ‘a position of economic dependence’, is defined as ‘the position of dependency of an undertaking in relation to one or more other undertakings characterized by the absence of a reasonable equivalent alternative, available within a reasonable time, and under reasonable conditions and costs, which allows this or each of these undertakings to impose performances or conditions that cannot be obtained under normal circumstances’ (Art. I/6 Belgian Code of Economic Law).⁶⁵

In France, the growth of the retail sector in the 1970s, which resulted in imbalanced economic dependencies between suppliers and distributors, prompted the introduction of the concept of abuse of economic dependence in the 1986 competition law.⁶⁶ The French competition authority has established four criteria to evaluate the presence of economic dependence, which include the supplier’s brand reputation, its market share, the significance of the supplier’s share in the retailer’s turnover, and the distributor’s ability to switch to another supplier on equivalent terms.⁶⁷ The probability of switching to an alternative supplier is crucial in identifying the existence of economic dependence, a criterion that has been interpreted narrowly in French case law.⁶⁸

As such, a dominant market position is not a prerequisite for finding an abuse of relative dominance. A common criterion that competition authorities in Germany, Belgium and France consider when assessing abuse of relative dominance is the difficulty or high costs for a trading party to switch to an alternative trading party in a vertical relationship.⁶⁹ It is noteworthy that the mere presence of competition among suppliers does not necessarily imply that there is a reasonable opportunity to switch. This is particularly pertinent in cases where the dependency involves a product with a recognized brand.⁷⁰ However, the concept of abuse of relative dominance still requires a restrictive interpretation in practice and may play an important role in addressing concerns in digital markets.

Nevertheless, false positives may also be the result of the application of a rule prohibiting abuse of a superior bargaining position, associated with over-enforcement. From an economic perspective, rules on relative market power prohibiting a party from abusing its superior bargaining position may minimize false negatives in the form of under-enforcement when regulating market power of digital platforms. Admittedly, the application of a rule prohibiting abuse of superior bargaining positions may lead to false positives, the prohibition of behavior that is not harmful from an economic perspective. Whether it is desirable to introduce the concept of relative dominance to address concerns caused by superior bargaining positions held by undertakings in digital markets therefore requires a trade-off between the risk of false positives and false negatives.

3. The need to introduce rules on relative dominance

As noted already, there is a high probability that digital platforms abuse their strong market power to impose unfair trading conditions on their business partners. This results in power asymmetries between the contractual parties in vertical transactions in digital markets. For example, undertakings may perform in the manner of naked coercion that exploits the dependence of vertically related customers, which establishes the excessiveness of the price or the significance of the asymmetry between contractual rights and obligations in question.⁷¹

One could argue that it is contract law, rather than competition law, that is to balance the positions of the contracting parties in transactions. In principle, contract law deals with purely internal issues of contracts, such as opportunistic behavior, transaction costs and information asymmetry irrespective of market impact.⁷² However, this approach overlooks how the freedom to conclude contracts impacts the market structure and the freedom to compete with market players in weaker economic positions.⁷³ Competition law only intervenes when the suspicious practice is persistent and cannot be corrected by the market itself. Indeed, competition law aims to correct market failures in the form of power asymmetries to ensure competition on the merits in the market. In other words, competition law is designed and implemented as an external constraint on the freedom of contract and restricts the operation of contractual arrangements only if social costs such as damages to the allocative efficiency and/or welfare of the whole economy are incurred.⁷⁴

The rationale behind the introduction of this concept, ‘abuse of relative dominance’, is to safeguard the weaker party’s freedom to compete against the potential exploitation of their counterparty’s superior bargaining position. A superior bargaining position can have an impact on the interests of the weaker party in the vertical relationship without necessarily changing the overall market dynamics on a horizontal level. Nevertheless, when these imbalances are widespread across a network of contracts, they may influence the market structure. This is, in particular, the case in the ‘ecosystem’ context, especially considering the multi-sided and conglomerate effects in digital markets. More specifically, relative market power may constrain the weaker party’s access to the market, cause high switching costs and thereby impede free competition.

If platform undertakings abuse their strong market power to impose unfair trading conditions on their business partners, that is likely to cause market failure due to its market ramifications to a substantial number of contracting parties based on a network of contracts rather than a single customer. This is similar to the Carrefour case in France.⁷⁵ Carrefour, a major player in the food retail sector, established a network of contractual agreements with its affiliated distributors. Through a series of interconnected contracts, Carrefour was able to establish dependency relationships with its affiliates and exert control over the network.⁷⁶ Every individual contract reflected the freedom of a single trading party, while a network of those contracts together created a de facto effect on the market structure and in turn constrained their freedom to compete. Likewise, platform undertakings typically operate across several interconnected markets, leading to conglomerate business models, which creates more severe negative effects in digital markets if the platform undertaking abuses its superior bargaining position and imposes unfair trading conditions upon weaker parties.

Of course, the practice of relative dominance does fall within the scope of competition law when it affects (or is likely to affect) the entire relevant market and distorts the competitive process. This is in line with the objectives of competition law, namely the protection of competition on merits and the protection of consumer welfare. Moreover, in cases of abuse of dominance, market power is a prerequisite in the relevant market, as defined by the CJEU as the power ‘to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers’.⁷⁷ The same idea applies to the scenario of abuse of relative dominance, which requires the existence of a certain degree of market power to behave independently towards a trading partner, which includes competitors, customers and final consumers.⁷⁸ As such, the concept of abuse of relative dominance applies to vertical business-to-business relationships and to business-to-consumer relationships.

Beyond the substance, the introduction of ‘abuse of relative dominance’ under competition law could open the possibility of public enforcement, in particular, in terms of fact-finding, as well as prosecution and punishment. Contract law is only enforced privately: only a party whose rights are infringed may file a lawsuit. Public enforcement is not available. Weaker parties in vertical transactions might lack the incentives to file a lawsuit, due to the high burden of proof and expensive costs in cases against stronger trading parties such as Google and Amazon. Public enforcement under competition law can serve as a complement, to detect, prosecute and systemically punish abusive parties. As such, a prohibition of abuse of relative dominance under competition law guarantees the opportunity to compete on the merits and thereby guarantees the openness and contestability of the market. This is, again, consistent with the goal of protecting competition on merits, which ensures the freedom to compete for all the market participants, regardless of dominant or not.

It is worth mentioning that protecting the freedom to compete for the relatively weaker parties is not intended to protect weak and inefficient undertakings. Instead, it protects undertakings confronted with counterparties who have relatively much more market power in digital markets. In this sense, the application of this concept requires a strict and case-by-case analysis in order to strike a balance between the risk of false positives and false negatives in its enforcement.

V. Conclusion

To sum up, even if a platform undertaking with superior market power does not meet the thresholds for gatekeeper status and thus escapes from the ex ante regulation by the DMA, it may still fall within the scope of Art. 102 TFEU. The remaining concerns caused by the practical challenges of proving ‘dominance’ within the meaning of Art. 102 TFEU by digital platforms, and the abuse of a superior bargaining power over contracting parties, even in the absence of such dominance, can be addressed by introducing rules on relative dominance. Such rules prohibit a party from abusing its superior bargaining position, even when it does not hold a dominant position under Art. 102 TFEU. The legal and economics analysis provides an overview of where rules on ‘relative dominance’ stand in the regulation of risks arising from the strong market power of digital platforms. In other words, rules on ‘relative dominance’ bridge the gap left by the DMA and Art. 102 TFEU.

From an economic perspective, rules on relative dominance prohibiting a party from abusing its superior bargaining position under competition law can minimize the false negatives in the form of under-enforcement when regulating market power in digital markets. Nevertheless, false positives may also result from the application of rules prohibiting abuse of superior bargaining positions, associated with over-enforcement. Therefore whether it is desirable to introduce the concept of relative dominance to address concerns caused by superior bargaining positions held by undertakings in digital markets requires a trade-off between the risk of false positives and false negatives. As in the case of abuse of dominance, a case-by-case analysis is required. Since the introduction of the concept of ‘abuse of relative dominance’ aims to reduce false negatives in the form of under-enforcement, a restrictive and prudent interpretation of this concept in practice is desirable to avoid the potential false positives in the form of over-enforcement.

Acknowledgements

This research has been funded by the RegTech4AI AiNed Fellowship Grant, supported by the Dutch National Growth Fund (the NGF) under file number NGF.1607.22.028.

Footnotes

Author notes