New Regulation on Abuse of Market Dominance and Prospect of Public Enforcement in China

By ZHANG Chenying (Tsinghua University)1

Introduction

From August 1, 2008, the date China’s Anti-Monopoly Law became effective, China’s anti-monopoly law enforcement authorities have identified 61 cases of abuse of market dominance,2 and punished certain relevant undertakings, including in several well-known cases, such as the Qualcomm case pursued by the National Development and Reform Commission,3 the Tetra Pak case by the former State Administration for Industry and Commerce,4 and the chlorpheniramine maleate case by the State Administration for Market Regulation.5 The industries involved in the cases are mainly those important to various people’s livelihood, such as telecommunications, water/power/gas, salt, and medicine, accounting for 50% of the total number of the cases.

On April 10, 2018, the State Administration for Market Regulation6 (“SAMR”) was established to be responsible for anti-monopoly law enforcement in a centralized way, ending past decentralized law enforcement. and developing a unified standard of enforcement. On June 26, 2019, the SAMR promulgated the Interim Provisions on Prohibiting Abuse of Market Dominance (the “Interim Provisions”),7 which became formally effective on September 1, 2019. The Interim Provisions summarize the approaches and mature law enforcement practices over the past decade, unify, refine and optimize the system for regulating abuse of market dominance after the integration of anti-monopoly law enforcement authorities in China, address the difficulties in enforcement practices, and make law enforcement more transparent and predictable, which is a crucial milestone in the development and improvement of China’s system of laws regulating abuse of market dominance. The Interim Provisions have made many breakthroughs in the system of substantive laws on determination of illegal acts and may serve as an important signpost to the future anti-monopoly law enforcement in China.

I. Overall Progress of the Interim Provisions

Based on Chapter III “Abuse of Market Dominance” of the Anti-Monopoly Law, the Interim Provisions aim to prevent and prohibit the abuse of market dominance, regulate and protect market regulation authorities’ exercise of their powers based on the law, and effectively guide market players to operate following the laws and regulations. The Interim Provisions, consisting of 39 articles, not only summarize the experience of law enforcement, but also focus on solving practical problems. The system is designed mainly by:

A. Improving the Law Enforcement Mechanism

It is the power of the central authorities to enforce the anti-monopoly laws. To fully mobilize local law enforcement forces, the Interim Provisions clarify that an authorized provincial administration for market regulation shall be responsible for the enforcement of anti-monopoly laws against the abuse of market dominance within its administrative territory, granting a general authorization in respect of the cases of abuse of market dominance. These Interim Provisions have strengthened the regulation of law enforcement activities implemented by provincial administrations for market regulation, and establish a strict regulation mechanism, which is conducive to orderly enforce anti-monopoly laws against abuse of market dominance and develop a unified and open market system with orderly competition across the country.

B. Clarifying the Law Enforcement Procedures

By taking the types of abuse into consideration as a starting point and the standard for categorizing and according to the main links in investigating and prosecuting these cases, the Interim Provisions specify the procedural provisions on reporting, case-filing, investigating and prosecuting; clarify how commitment shall be made, such as application, rationales, decision procedure; set out the contents of administrative penalties; and requires that relevant decisions shall be announced to the public according to the law, making the enforcement of anti-monopoly laws more standardized and transparent.

C. Refining Relevant Considerations and Specific Circumstances

The Interim Provisions mainly refine the provisions on considerations in determining an abuse of market dominance, the specific circumstances of application, punishments, and so on. The foregoing provisions correspond to a few provisions of the Anti-Monopoly Law, i.e. Articles 17-19, which only set forth the general descriptions of the principles, leading to such problems like low feasibility and unclear guidance. On the basis of the experience of law enforcement summarized, in the Interim Provisions refine these provisions individually to meet the needs of actual law enforcement.

The Interim Provisions optimize the provisions of the Anti-Monopoly Law, define the rationales that identify the abuse of market dominance and divide the substantive rules into those on determination of market dominance, those on “abuse,” and those on “valid reason” defense. Being well-organized and providing clear guidance, the Interim Provisions can help operators with compliance and facilitate law enforcement.

II. Determination of Market Dominance

Articles 6 to 13 of the Interim Provisions further refine the reasons for which an operator may be determined  to have market dominance as defined in Article 18 of the Anti-Monopoly Law. Moreover, it is important to note that the Interim Provisions specify the considerations in holding an activity to be as abusing market “dominance”. In the practice of law enforcement, it is important to conduct a specific analysis on some or all of the considerations based on the specific circumstances of case, other than each specific consideration.

A. Market Control.

The market share, market competition, and capability to control the sales market and procurement market are all indicators for analyzing the market control of an operator. Firstly, market share is the most important factor reflecting the market control of an operator. Article 6 of the Interim Provisions stipulate that the indicators for determining the market share of an operator in relevant market are sales amount, sales volume or other indicators, where “other indicators” include the indicators such as production capacity of the operator and number of user, providing more dimensions to law enforcement authorities and more accurately reflecting the market share of an operator. Secondly, an analysis on the competition in relevant market is fundamental for judging the market control of an operator. The Interim Provisions mainly identify such considerations as the market development, market structure, product difference, sales and procurement model, and by taking into account market reality and competition, add considerations such as “innovation and technological change, and sales and procurement model”. Finally, the capability to control sales and raw materials directly reflects the capability of an operator to control the market. The Interim Provisions expand the sales and raw materials markets to the “upstream and downstream markets along an industrial chain”, and add the description of the “capability to [preferentially obtain] other resources that need to be invested” and other factors, to better match the actual market conditions and to meet the needs of law enforcement.

B. Market Position.

Both the financial and technological conditions and the dependence of other operators are indicators for analyzing the market position of an operator. The financial and technological conditions reflect the overall strength and competitiveness of an operator. Article 8 of the Interim Provisions identify the specific factors that can be used to assess the financial and technological conditions of an operator: mainly asset size, profitability, financing capability and other factors reflecting existing and potential financial strength, for the financial conditions; mainly research and development capability, technological equipment, technological innovation and application capability, owned intellectual property and other factors relevant to technology. In particular, it adds “in what way and to what extent the financial and technological conditions can help the operator expand business or consolidate and maintain market position”, indicating that law enforcement authorities will comprehensively consider the contribution of financial and technological conditions to the market power. The market position of an operator is partly reflected in the degree of dependence of other operators on the operator. Article 9 of the Interim Provisions identifies the specific factors that can be used to assess the degree of dependence, including trading relationships, trading volume, trading duration, difficulty in turning to other counterparties, etc. The focus is on analyzing the degree to which other operators depend on the operator in order to operate. It adds the expression “within a reasonable time” based on practical experience. A lot of practice shows that the key difficulty in turning to other counterparties lies in how much time it takes to do so: the longer the time, the higher the cost and the greater the difficulty.

C. Market Entry.

The difficulty with market entry determines the stability of a market pattern and the possibility for potential competitors to participate in market competition. In general, the more difficult the market entry is, the higher the possibility that an operator has market domination; the less difficult the market entry is, the greater the competition may arise from potential competitors. Based on the original administrative regulations, namely the Anti-price Monopoly Regulations and the Regulations of the Administration for Industry and Commerce on Prohibiting Abuse of Market Dominance, Article 10 of the Interim Provisions makes a major breakthrough by identifying the specific considerations in assessing the difficulty with market entry: market access, difficulty in obtaining necessary resources, control over the procurement and sales channels, size of capital investment, technological barriers, brand dependence, user conversion costs, consumption habits, etc. From the perspective of law enforcement, operators will conduct detailed analysis and evaluation on market entry, and law enforcement authorities will consider market entry as a key factor. Therefore, the refinement of the factors for analyzing market entry can make operators’ expectations more stable.

D. Determination of Market Dominance in Relation to Intellectual Property.

An operator holding an intellectual property right does not necessarily imply market domination. By summarizing the experience of law enforcement, especially in the Qualcomm monopoly case, Article 12 of the Interim Provisions identify the special factors that can be considered in determining the market dominance of an operator in relation to intellectual property, including substitutability of intellectual property, downstream market participants’ reliance on goods supplied by exploiting intellectual property, and counterparties’ capability to check and balance operators. It is also important to note that the analysis for determining the market dominance of an operator in relation to intellectual property is based on the same framework under other circumstances, and that instead of being independent of the provisions of the Anti-Monopoly Law or the detailed provisions of the Interim Provisions, the foregoing considerations listed in this paragraph are specific regarding intellectual property in determining market dominance.

E. Considerations in Determining Collective Dominance.

Article 19 of the Anti-Monopoly Law states the market share standard used for presuming a set of operators consisting of two or three operators has market dominance, thereby introducing the concept of collective market dominance. By summarizing the practice of law in the isoniazid case,8 the chlorpheniramine maleate case9 and other cases, and drawing on relevant systems and practices in the European Union, Germany and other countries and regions in the world, the Interim Provisions clearly state in Article 13 the considerations in determining “collective market dominance,” including market structure, transparency of the relevant market, degree of homogenization of goods, concertedness of operators’ actions, etc. According to economic theory and enforcement practice, the possibility that two or more operators have market dominance is higher if the market structure is more concentrated, the market more transparent, the goods are more homogenous, and the action more concerted.

It is important to note that the analysis for determining the market dominance of two or more operators is based on a different framework in the sense that, in addition to the factors for determining the market dominance of an operator as set out in Articles 5 to 12 of the Interim Provisions, the specific factors listed above in this paragraph must be considered, in order to determine the two or more operators should be treated “as a whole”. This essential element of “collectiveness”, together with the other essential element of “dominance”, constitute the integral elements for determining the “collective dominance”.

 

III. Determination of Price Reasonableness

Among the provisions on abuse of market dominance in Article 17 of the Anti-Monopoly Law, the first item is “to sell goods at an unfairly high price or to purchase goods at an unfairly low price”; the second item is “to sell goods at a price below cost without valid reason”, namely predatory pricing. On one hand, the price is the most intuitive indicator reflecting the competitiveness of the goods, On the other hand, in practice, the reasonableness of the price and the determination of cost are very complicated issues. Moreover, PRC law did not distinguish exploitative abuse and exclusive abuse. The Interim Provisions act as successful pioneer in this regard.

A. Refining the Considerations in Determining a Fair Price.

The determination of an “unfairly high price” or “unfairly low price” has always been a difficult issue in anti-monopoly law enforcement practice. By summing up the administrative law enforcement and judicial practices regarding, among other things, the case of Qualcomm’s abuse of market dominance, the monopoly case of Huawei v. Interactive Digital for abuse of market dominance,10 and by reference to the practice in other jurisdictions, it is difficult to make quantitative analysis to the price which is not a prerequisite for qualitative analysis. In the spirit of the Anti-Monopoly Law, in order to regulate the “sale at unfairly high price” or “purchases at unfairly low price”, the focus shall be on “whether it is unfair” rather than on “how much higher” or “how much lower”. With this regard, Article 14 of the Interim Provisions focuses the analysis on “whether it is unfair” and specifically lists the specific manifestations of “unfairly high price” and “unfairly low price”. The analysis mainly includes horizontal comparison and vertical comparison.

1. Horizontal Comparison. The horizontal comparison refers to, in respect of an operator and for a given period, a comparison of the price of such operator with other operators, or a comparison of the prices of such operator in one region with in other regions, where all the prices are static. This issue has two specific manifestations: first, whether the sales price or purchase price is obviously higher than or obviously lower than the prices at which other operators sell or purchase the same goods or comparable goods under the identical or similar market conditions; second, whether the sales price or purchase price is obviously higher than or obviously lower than the prices at which the same operator sells or purchases goods in other regions with identical or similar market conditions.

2. Vertical Comparison. The vertical comparison refers to the analysis on whether the price of the same operator vary in normal range over different periods, where the prices are dynamic and the analysis focuses on the fairness of price changes. This issue has two specific manifestations: first, where the cost is basically stable, whether the sales price is adjusted up or the purchase price is adjusted down beyond the normal range; second, whether the increase in sales price is obviously larger than the increase in cost, or whether the decrease in purchase price is obviously larger than the decrease in the counterparty’s cost.

It is important to note that in the foregoing comparisons, “obviously” is a clear requirement. In the practice of law enforcement, if upon comparison, the price difference is found to be very small or reasonable, the price will generally be considered not to constitute an “unfairly high price” or “unfairly low price”, which will be subject to analysis on a case-by-case basis.

B. Clarifying the “Cost” Element for Predatory Pricing

Article 17 of the Anti-Monopoly Law prohibits any operator with market dominance from selling goods at a price lower than the cost without valid reason. Although there are no precedents in practice, the no-fee model and subsidy policies of Internet companies have drawn much attention from law enforcement authorities in recent years. Based on past experience, the key to enforce law according to Article 17 is to determine whether the operator’s sales of goods at a price lower than the cost and therefore constitutes abuse of market dominance based on the definition of the “cost”. The “cost” is the element for determining whether the operator’s act is legal.

Cost is a complex economic concept, with many extended concepts such as total cost, average cost, marginal cost, and variable cost. Under the national conditions, and by fully referring to the practices in other countries, Article 15 of the Interim Provisions stipulates that the key is to consider whether the price is lower than the average variable cost. If the operator sells goods at a price lower than the average variable cost, it will lose more money for each additional unit of goods produced and sold. The selling by the operator under such circumstances should violate the basic economic rationality, and the purpose of such operator is highly likely to be to crowd out the competitors.

On the contrary, if the operator sells goods at a price higher than the average variable cost, the operator will be profitable while recovering the average variable cost with its purpose highly likely to be to maintain production and operation, which is somewhat economically rational. That why the “average variable cost” is chosen to be the indicator for identifying the cost. Moreover, in view of the possible cross-subsidization in bilateral or multilateral markets in new economic forms such as the Internet, the free goods and relevant paid goods provided by the operator shall be taken into overall account in determining the “cost”.

IV. “Valid Reason” Defense

In the practice of law enforcement, it is a complicated process to determine whether an act of an operator constitutes an abuse of market dominance. Some acts might have formal elements for defining abuse of market dominance, but they are commercially reasonable and should not be regulated. Mainly by refining the description of the “valid reasons”, the Interim Provisions clearly reflect the principle that the law enforcement authorities should determine the abuse of market dominance prudently by taking into full consideration the commercial reasonableness. According to the Anti-Monopoly Law, an act with formal elements of abuse of market dominance will constitute an abuse of market dominance only when an operator takes action “without valid reason”. The Interim Provisions specify the possible valid reasons respectively for all types of suspected illegal abuse, by which the Interim Provisions refine the provisions of the Anti-Monopoly Law, and enhance the law enforcement operability and market expectations. Moreover, “valid reason” is a defense cause rather than a constituent element and needs to be proved by the operator.

A. Refusal to Deal.

Article 16 of the Interim Provisions enumerates four types of refusal to deal which an operator with market dominance is prohibited to carry out: refusal to conduct existing deal (including two sub-types), refusal to conduct new deal, disguised refusal to deal, and refusal to provide necessary facilities. However, the implementation by an operator of any of the foregoing acts does not necessarily constitute an abuse of market dominance. Any of the foregoing acts implemented with valid reason does not constitute an offence. The Interim Provisions enumerate the specific valid reasons, including: 1. failure of deal objective circumstances such as force majeure; 2. bad credit record or deterioration of business conditions of the counterparty etc., affecting the security of the deal; 3. Reduction of the operator’s interests due to implement of deal. In specifying the foregoing valid reasons, the Interim Provisions have fully considered the possible commercial reasonableness of operators’ acts in practice and protect operators’ normal business acts. In the practice of law enforcement, the foregoing valid reasons need to be proved by the operator.

B. Restriction on Deal.

Article 17 of the Interim Provisions provides for three circumstances of restriction on counterpart: limiting counterparties to dealing to the operator itself, to trade with another operator designated by the operator, and forcing the counterparties not to deal with any particular operator. Compared with the previous regulations, Article 17 of the Interim Provisions adds the notion of a “disguised restriction” in each of the three circumstances.

In the practice of law enforcement, some operators’ acts are subtle in the sense that, instead of directly limiting the dealing object, they use technological means or contractual arrangements to achieve the purpose of setting restriction on deal in disguise. Regardless of the means, these disguised acts constitute a restriction on deal as long as they objectively affect the free choice of the counterparties, substantially limit the dealing object. As for “valid reasons”, the Interim Provisions names the following three reasons as a valid reason: necessity to meet product safety requirement, necessity to protect intellectual property, and necessity to protect the investment made specifically for the deal. In specifying the valid reasons accordingly, the Interim Provisions have fully considered the possible reasonableness of restriction on deal, reflecting the protection of product safety, intellectual property and investment promotion.

C. Tie-in Sales and Other Unreasonable Additional Trading Conditions.

With respect to these illegal acts most commonly investigated and prosecuted by administrative law enforcement authorities, accounting for over 50% of the total, Article 18 of the Interim Provisions provide for five circumstances of tie-in sales and other unreasonable additional trading conditions, and delete the expression of “force” in the original provisions on tie-in sales. In the meantime, the Interim Provisions substantially complement the provisions on the “valid reasons” for tie-in sales and other additional unreasonable trading conditions, including the compliance with legitimate industry practices and trading practices, necessity to meet product safety requirement, and necessity to implement specific technology, etc.

These reasons are set out based on commercial practice, by taking full account of the general practices of the operators and in industries. Such reasons are the acknowledgement to the reasonability of tie-in sales or other additional trading conditions to a certain degree and a highlight to the principles of being scientific and prudent in determining abuse of market dominance.

D. Discrimination

Article 19 of the Interim Provisions enumerates four types of specific discrimination implemented by the operators with market dominance. According to the Anti-Monopoly Law, the comparability between different counterparties is an important premise for constituting discrimination. The Interim Provisions clarify that “comparability” means that there is no difference between different counterparties that will substantially affect the deal in terms of trade security, trade cost, size or capability, credit status, trading link, trading duration, or the like. Similarly, the Interim Provisions also substantially complement the provisions on the “valid reasons” for discrimination: First, the different trading conditions are set based on the actual needs of the counterparties and in compliance with legitimate trading practices and industry practices, mainly by considering the notion of a tailored deal, in which the operator offers different goods and trading conditions based on the needs of different counterparties. Second, the preferential campaigns are carried out within a reasonable period for new users’ first deal. It is important to note that three essential elements, i.e. the new user, first trade, and reasonable period, as mentioned in this Paper shall be satisfied simultaneously.

V. Special Provisions on Abuses in New Economic Forms

In recent years, the problems with respect to the competitions in new economic fields, such as the Internet, multilateral platform, and big data, have become prominent. The anti-monopoly enforcement practice in various countries around the world shows that, the basic system framework of the modern anti-monopoly laws, including the analysis on and determination of abuse of market dominance, also applies to the operators in new economic fields such as the Internet. However, unlike the traditional economic forms, the Internet and other new economic forms have prominent features, such as dynamic competition, innovation competition and cross-border competition. In new economic fields, relevant markets are bilateral or multilateral, and the network effects are obvious, posing a big challenge to the traditional approaches to and considerations in monopoly law enforcement. The Interim Provisions address the issues concerning the prevention of new illegal acts, such as data monopoly, platform monopoly, and algorithmic discrimination.

A. Determination of Market Dominance.

Article 6 of the Interim Provisions first expands the considerations to be taken into in determining market share. In addition to the sales amount and sales volume, it makes clear that “the proportion of other indicators in relevant market” can be considered about, providing a basis for determining the market share of an operator in the field of Internet. More importantly, Article 11 of the Interim Provisions enumerates the factors that can be considered about when determining the dominant position of an operator in new economic forms such as the Internet, including “characteristics of competition in relevant industry, business models, number of users, network effects, lock-in effects, technical characteristics, market innovation, capability to obtain and process relevant data, operator’s market power in connected markets, and other factors”.

The Interim Provisions fully absorb the contents of the judgments made by competent judicial organs in litigation cases in the field of Internet in China, including the monopoly dispute between Qihoo and Tencent;11 they also draw on the excellent experience and mature practices in the field of Internet in other jurisdictions, such as “number of users” and “capability to obtain and process relevant data”. In the case of EU punishing Google for abuse of market dominance,12 the case of German Federal Cartel Office determining Facebook’s abuse of market dominance,13 and other cases, the number of users and big data about users have become the focus of law enforcement. The Interim Provisions highlight the characteristics of new economic fields such as the Internet, which help to provide clear guidance to the operators on how market dominance is determined in the field of Internet during the practice of law enforcement.

B. Determination of Abuse of Market Dominance by “Predatory Pricing”

Article 17 (2) of the Anti-Monopoly Law provides for a type of abuse: “predatory pricing”. In recent years, law enforcement authorities have realized that such low-price subsidies and low-price dumping with the intention of crowding out the competitors are proliferating in new economic fields such as the Internet, which is not conducive to the sustained and healthy development of relevant industries and markets, and will damage the overall welfare of consumers in the long term.

In this context, Article 15 of the Interim Provisions clearly sets forth that, where an operator sells goods at a price lower than the cost, if it involves the no-fee model in new economic forms such as the Internet, the free goods provided by the operator and related paid goods should be considered comprehensively. In recent years, economists such as Evans and Tirole have promoted the considerable development of the “two-sided market” theory in the anti-monopoly economics, especially in new economic fields such as the Internet. These analysis approach and considerations have also been affirmed and adopted by law enforcement authorities and judicial organs in jurisdictions such as Europe and the United States. Although the Interim Provisions do not expressly mention “bilateral market”, these analysis approach and perspective of this economics are embodied in them, which reflect the full understanding and consideration of the characteristics of new economic forms such as the Internet.

China only recognizes the validity of statutory law. The validity of case law is not recognizable in China. There are only three provisions on prohibiting abuse of market dominance in the Anti-Monopoly Law. The generality of these provisions leads to unclear rules, excessive discretion, and low predictability, so that requires further refinement and clarification. In addition, the social and economic conditions have undergone major changes in the past ten years. In particular, the digital economy characterized by the Internet, multilateral platforms, big data, and algorithms has been changing business models and making more challenging the maintenance maintain the market order of fair competition. In view of these, by formulating the Interim Provisions, the competent law enforcement authorities address the aforementioned needs in a targeted manner, improve the transparency of law enforcement, and meet the requirements for inclusive and prudent supervision.

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1 Director and Associate Professor, Center for Competition Law Center, School of Law, Tsinghua University. Member of the Advisory Panel, the State Competition Commission.

2 China Market Regulation News: State Administration for Market Regulation Shows 11-year Anti-Monopoly Transcrip, http://mt.cicn.com.cn/index.php?s=/Wap/Article/detail/id/305635/page/3

3 Administrative Punishment Decision of National Development and Reform Commission [2015] No. 1, http://www.ndrc.gov.cn/gzdt/201502/t20150210_663824.html

4 Administrative Punishment Decision of State Administration for Industry and Commerce (SAIC Competition Case [2016] No. 1), http://www.samr.gov.cn/fldj/tzgg/xzcf/201703/P020190529595834177232.pdf

5 Administrative Punishment Decision of State Administration for Market Regulation (SARM Punishiment [2018] No. 21 and No. 22), http://gkml.samr.gov.cn/nsjg/bgt/201902/t20190216_288679.html

6 The State Administration for Market Regulation is the administrative authority responsible for public enforcement of anti-monopoly law, and the administrative regulations promulgated by it are the legal basis for guiding administrative law enforcement.

7 Decree 11 of State Administration for Market Regulation. http://gkml.samr.gov.cn/nsjg/fldj/201907/t20190725_305166.html

8 Administrative Punishment Decision of National Development and Reform Commission [2017] No. 1 and No. 2, http://jjs.ndrc.gov.cn/fjgld/201708/t20170815_857737.html

9 The same as in footnote 4

10 Guangdong Higher People’s Court (2013) Civil Judgment (Yue Higher Court Civil III Final No. 306)

11 Civil Judgment of the Supreme People’s Court (2013) Civil III Final No. 4, http://wenshu.court.gov.cn/website/wenshu/181107ANFZ0BXSK4/index.html?docId=4fe3cab686984f8f91313ec8b921b96c

12 Case AT.39740,https://eur-lex.europa.eu/legal-content/EN/TXT/?qid=1516198535804&uri=CELEX:52018XC0112(01)

13 china.com; Zuckerberg’s New-Year Gift: Facebook Is Ruled to Abuse Market Dominance, https://finance.china.com/tech/13001906/20190218/35236859_all.html#page_2