Oligopolistic Markets Under EU Law From The Aspect Of Collective Dominance
Ilgaz SARIOĞLU

 

1.Introduction

European Commission when controlling the anticompetitive behaviors in the market has three major legal instruments. While Art 81 (ex Article 85) of the Treaty prohibits all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, Art 82 (ex Article 86) prohibits any abuse by one or more undertakings of a dominant position. Merger Regulation on the other side aims to prevent the creation or strengthening of market structures distorting competition by prohibiting any concentration which creates or strengthens a dominant position. Whereas Art 81 and Art 82 deal with anticompetitive behaviors ex post, Merger Regulation deals with cases exante. These legal instruments are designed and therefore supposed to cover all the possible anticompetitive behaviors in various types of markets such as pure competition, oligopoly and monopoly. However, Commission, by time, recognized that a certain type of oligopoly, namely tight oligopolies, may lead to anticompetitive behavior and yet not be caught under Community Competition Law.

The challenge is inherent in the structure of tight oligopolies. There exist only a few numbers of players in the market, which have to consider each other's decisions regarding price or output. Actions of one player affect the actions of other players in the market. Thus, the players are dependent on each other while trying to maximize their profits. Game Theory indicates that, in repeated games, once they recognize their interdependence, firms prefer not to compete due to the fact that they are better off in this way. Thus, the prices may rise to an anticompetitive level with parallel behavior of oligopolists but without explicit coordination. The gap in the regulation emerges at this point. The parallel anticompetitive behavior does not arise due to agreements between parties.

Commission was faced with an anticompetitive behavior but articles of Treaty did not seem to provide legal means for the regulatory intervention. If it were a cartel agreement or a concerted practice between oligopolists, it would be caught under Art 81 of the Treaty. However, there is no explicit collusion, there is no explicit coordination. Prices rise as a result of interdependence inherent in the structure of the market, therefore, cannot be caught under Art 81. On the other side, because that Art 82 has been associated with single dominance by ECJ, Art 82 cannot handle the issue as well.

Commission, ambitious to fill this gap, first attempted to extend the scope of the concept of concerted practices under Art 81. However, ECJ in its judgment in Wood Pulp case ruled out this possibility. Court held that parallel conduct could not itself be regarded as proof of concertation unless that was the only plausible explanation. This time, Commission turned to Art 82. By interpreting the wording of Art 82, which says abuse of dominant position by one or more undertakings, Commission developed a totally new legal concept to control the oligopolies: Collective dominance. Commission used this concept in some of its decisions but this time in the judgment of Hoffman La Roche case, ECJ stated that parallel courses of conduct peculiar to oligopolies should be distinguished from dominant position. Thus, in the end ECJ closed the doors of both Art 81 and Art 82 to control of oligopolies implying that parallel behavior arising from the structure of market cannot be associated with either concerted practice or dominant position.

The doors closed by ECJ were opened by CFI's judgment in Italian Flat Glass and stayed open then. In this paper, it will be argued whether collective dominance as a legal concept developed by Commission and refined by European Courts has become a means to control oligopolies as intended. For this purpose, first of all the structure of tight oligopolies leading to parallel anticompetitive behavior would be explained in the context of economic theory to emphasize the need to regulate oligiopolies. In this framework, the characteristics of markets, the incentives of the players and punishment mechanisms would be referred in relation to how they make markets conducive to tacit collusion, and more importantly how they make tacit collusion possible and sustainable. Following, the first attempts of Commission to control oligopolies under Art 81 and Art 82 would be pointed out together with emphasis on ECJ's approach trying to rule out the anticompetitive parallel behavior. Consequently, in the framework of landmark cases the evolution phases of the concept of collective dominance would be analyzed, namely the rebirth period where European Courts approved the applicability of the concept of collective dominance under Art 82 and Merger Regulation; development period where the definition of the concept covers the oligopolistic interdependence and finally the clarification period where the concept of collective dominance is associated with mainly tacit collusion under Merger Regulation and a new gap in oligopolies relating to unilateral effects is noticed. In all of these sections, the focus would be majorly on judgments of European Courts defining the concept. However, Commission's approach as the regulatory body trying to fill the lacuna in community competition law, enjoying a certain discretion in particular in the application of Merger Regulation, would be emphasized to identify the similarities and differences between the approaches of Commission and European Courts. To put in other words, what the Commission intended to do and how the concept of collective dominance ended up through the judgments of European Courts would be discussed.

2.THE NEED TO REGULATE OLIGOPOLIES: Oligopolistic Interdepence

Oligopolies are market structures where a small number of firms operate in the market. In that sense, oligopolies stand somewhere between pure competition and monopoly. When it is the case for either pure competition or monopoly, firms are clearer about deciding about their pricing. A monopolist, as being the only firm in the market, can limit its supply and set its price at a anticompetitive level whereas in pure competition there are so many firms that the price is at the level where equals to marginal cost. The common feature of both structures and at the same time the feature that distinguishes these structures from oligopoly is that firms are not dependent on rivals when they are setting prices. The best choice in setting price and maximizing the profit depend very much on the prices' of rivals in oligopolies since there are only a few numbers of players in the market. To put in other words, they have to take into account and make assumptions about the other firms' decisions before they make their own decisions prices (Scherer, 1990, p.199). For instance in a market with two players, a price decrease to gain a bigger share of the market and therefore to maximize the profits will be followed by a similar price decrease by the second firm in order not to lose share. In the end, both of the firms would be selling at a lower price, thus making less profit (Stroux, 2000, p.5).

This interdependence between the firms is known as oligopolistic interdependence. When the firms recognize this interdependence, they also recognize that they can gain more. When a firm increases its prices following the price increase of other firm, then the prices would be above the competitive level and both of the firms would benefit this situation. The game theory explains why firms choose not to compete once they figure out that they are interdependent. Every oligopolist is supposed to be a rational player trying to choose the best strategy to maximize its profits depending on the strategies of the other players in the market. Prisoner's Dilemma developed under this theory shows this interdependence very well. Suppose the first firm sets a price to maximize its profits. If the other firm sets a lower price, the first one would lose market share. If the other firm sets a higher price, then it will gain market share. If both of the firms lower their prices, then they both lose. Therefore, in repeated games, when oligopolists discover that pricing decisions of competitors affect their actions, they understand that the best strategy maximizing the profits for all is the case where all increase their prices. So firms may make best use of this interdependence and choose not to compete (Stroux, 2000, p.6). This is known as tacit collusion or tacit coordination. Different from the explicit collusion arising between undertakings due to agreements, there is no explicit coordination here.

Although there is possibility of tacit collusion especially in tight oligopolies, this is not quite simple as it seems (Scherer, 1990, p.199). In repeated games it is assumed that firms learn about the market conditions and competitors' intentions but, there might still be uncertainties in the market. There is always a danger that a competitor might cheat and undercut prices threatening the collusion in the market. In some other cases market structures or product characteristics may make parallel behavior in oligopolies more difficult. Therefore, although in theory it seems possible, not all the oligopolies are by definition anti competitive (Stroux, 2000, p.3). Hence, it is not easy to draw a line between the benign ones and the anticompetitive ones. As Scherer put it In oligopoly virtually anything can happen (Scherer, 1990, p.199).

The identification of difference requires a sound economic analysis of market structure, market characteristics and product characteristics, such as number of suppliers and concentration in the market, cost structure of the firms, transparency, present and past competitive behavior, multimarket contacts, demand growth, demand elasticity, product homogeneity and level of technology in the market. When the number of the sellers is few and concentration is high, when the effect of fringe players on competition in the market is less, when the firms produce homogeneous goods, which are significantly similar in terms of physical characteristics and subjective respects (Scherer, 1990, p.279), when the level of technology is mature, when the demand is stagnant or slowly growing and when firms have similar cost structures (Scherer, 1990, p.285), it would make it easier for the oligopolists to coordinate their pricing decisions. Although the economic theory gives insight about the facilitators of tacit coordination, the existence of coordination is actually not equal to the existence of these factors. In fact it is a function and interaction of these factors, however there is no formula in hand.

The next issue is whether it would be rational for the oligopolists to coordinate under these circumstances (Kloosterhuis, 2001, p. 79). The existence of factors given above is not by themselves sufficient for the tacit collusion to emerge. It is also important that market is transparent enough so that the players in the market are in a position to know and monitor each other's prices and transactions (Scherer, 1990, p.215) so that they can detect if one of the players cheat. Besides, a credible punishment mechanism is required to deter the players from cheating. If a firm in the market cheats and lowers the prices, it is possible that in the short run, it can maximize its profits. However, if there is a possibility that this action would be retaliated, which may in fact may lead to price wars and heavy losses, firms may prefer to sustain tacit collusion since it is more likely to make profits in the long run than to make profits in the short run.

3.EARLY ATTEMPTS OF COMMISSION TO CONTROL OLIGOPOLIES

Commission, being very well aware of the need to control anticompetitive behavior in oligopolies attempted to make use Art 81 and Art 82 of the Treaty. The problem was that there existed no implicit provisions regulating oligopolistic markets under both of the articles (McGregor, 2001). So Commission first tried to extend the concept of concerted practices under Art 81 and then developed a new concept of collective dominance under Art 86.

3.1. Extension of the Concept of Concerted Practices

Commission first turned to Art 81 to be able to control oligopolistic behaviors under the concept of concerted practice. The question was whether it would be possible to catch conscious parallel behavior arising from the interdependence inherent in the market structure of oligopolies through using the concept of concerted practices. However, Court after various judgments regarding concerted practices finally in the judgment of Wood Pulp case clarified the issue and closed the doors to the assessment of parallel behavior under concerted practices.

Despite the attempts of the Commission, in fact, Court beginning from the Dyestuffs case revealed its approach towards excluding pure parallel behavior from the concept of concerted practices. Court in Dyestuffs case , where Commission found that general and uniform increases in price of dyestuffs emerged from concerted practices, stated that although parallel behavior may not by itself be identified with a concerted practice, it may, however, amount to strong evidence of such a practice if it leads to conditions of competition which do not correspond to the normal conditions of the market, having regard to the nature of the products, the size ad the number of undertakings, and the volume of the said market. Thus, by this statement Court for the first time revealed its approach excluding pure parallelism from the concept of concerted practice (Stroux, 2000, p.14).

Following in the judgment of Suiker Unie case, Court interpreted the parallel behavior as the right to adopt themselves intelligently to the existing and anticipated conduct of their competitors and continued that this behavior does strictly preclude any direct or indirect contact between such operators. So this means that because that there is no concertation, oligopolistic interdependence cannot be taken as claimer for parallel behavior in the meaning of concerted practice (Stroux, 2000, p.14).

Finally in Wood pulp case Court held that parallel conduct could not itself be regarded as proof of concertation unless that was the only plausible explanation (Soames, 1996). If there is no specific evidence of collusion, then it means there is no way of controlling tight oligopolies under Art 81 (Stroux, 2000, p.15).

3.2. Use of Art 82

In the judgment of Hoffman La Roche ECJ said that

A dominant position must also be distinguished from parallel courses of conduct which are peculiar to oligopolies in that in an oligopoly the courses of conduct interact, while in the case of an undertaking occupying a dominant position the conduct of the undertaking which derives profits from that position is to a great extent determined unilaterally.

By basing the judgment on the reasoning that nature of dominant position requires unilateral conducts, this statement restricts the use of Art 82 in control of oligopolies explicitly and at the same time limits the development of collective dominance concept. Considering that Court also limited the use of Art 81 as well, a gap reemerged in Community Competition law where Commission did not have any legal instrument to control oligopolistic markets in spite of all its attempts. This means that tacit collusions would not be able to be caught by the Commission (Albors-Llorens, 2002,p.154).

4. REBIRTH OF THE CONCEPT OF COLLECTIVE DOMINANCE

Given the Commission's insistent approach to regulate oligopolies and to develop the concept of collective dominance on one side and ECJ's reluctant approach to apply the concept, CFI's judgment regarding Italian Flat Glass case has been a turning point in the evolution of the concept. CFI in its judgment In Italian Flat Glass case accepted the application of the concept of collective dominance under Art 82. Following, the application of concept under Merger Regulation was accepted by Court in the judgment of Kali/Salz case. Although, both of the judgments left many questions open regarding the definition of collective dominance, the concept started to develop finally.

4.1. Italian Flat Glass Case

In Italian Flat Glass case, Commission found collective dominance under Art 82 in flat glass market based on the facts that the undertakings formed part of a tight oligopoly with a market share of 80% and there were structural links such as agreements or concerted practices between the undertakings which in the end led undertakings to present themselves on the market as a single entity and not as individuals. The Commission particularly noted that this situation has not aroused due to the structure of the market. However, Commission also noted in its defense that even in the absence of agreements but in the existence of oligopolistic position, there would still be a finding of collective dominance . The referral of the Commission to oligopolistic interdependence in the context of collective dominance although the facts of the case are different is a significant indication of its approach in developing the concept.

The parties appealed the case with the main pleas that Art 82 could be applied to undertakings which only form a part of single economic unity, that the Commission used the evidence used for the infringement of Art 81 as evidence for Art 82 as well and that they are not in a dominant position . In the assessment of the pleas, the Court first of all acknowledged that Art 82 can be applicable to more than one independent undertaking depending on both the wording of the article reading as abuse of dominant position by one or more undertakings and the reasoning that the meaning of undertaking was not different from the one used in the context of Art 85 . This, in a way, ended alleged dichotomy between Art 85 and Art 86, now both provisions applying to more than one independent undertaking (Stroux, 2000, p.19, Pope, 1993).
Contrary to other judgments of ECJ, CFI for the first time accepted the application of Art 82 to more than one independent undertaking, thus opening the way to the emergence of a new concept, collective dominance in competition law and at the same extending the powers of Commission. The Court continued in its judgment with a definition of the concept by stating that

There is nothing in principle, to prevent two or more independent economic entities from being, on a specific market, united by such economic links that, by virtue of that fact, together they hold a dominant position vis-à-vis the other operators on the same market. This could be the case, for example where two or more independent undertakings jointly have, through agreements or licenses, a technological lead affording them the power to behave to an appreciable extent independently of their customers and ultimately of their consumers.

According to this statement, being collectively dominant requires two main elements, which are being united and economic links. Being united may in a sense be supposed to have the same meaning with presenting themselves as a single entity and not as individuals to which Commission referred in its decision. But what will prove the united position of independent undertaking As for the economic links, Court did not give any explanation or definition, therefore left the question of what could be considered as economic links open. Only an example was given referring to agreements, licenses or a technological lead, which seem to be structural links. The judgment immediately brings the question of whether every agreement between undertakings may lead to a finding of collective dominance, particularly the ones infringing Art 81 (Soames, 1996). Court answered this question in the judgment by stating that it is not possible to recycle the facts used as evidence for the infringement of Art 81 and concluded that these agreements by themselves do not lead to the finding of collective dominance.

Another point to be noted is that although in the defense of Commission oligopolistic interdependence has been referred to regarding the finding of collective dominance, it has not been mentioned in the CFI's judgment. CFI's approach did not seem to cover oligopolistic interdependence (Monti, 1996, p.91). However, the uncertainty remained for some time (Bavasso, 1999, p.60).

Court annulled the decision in its entirety basing on the reasoning that Commission could not substantiate the finding of dominance. However, it is quite remarkable that Court accepted the application of the concept under Art 82. Following, as expected, this decision had implications for Merger Regulation where dominance concept is central (Pope, 1993).

4.2. Kali Salz Case

The significance and importance of France v Commission judgment is very similar to Italian Flat Glass in that this is the one where ECJ accepted that collective dominance concept could be applied under Merger Regulation. Although collective dominance is referred previously for the first time in Nestle Perrier decision, because that the parties accepted commitments and did not appeal the decision, Court did not have the opportunity to make a rule about the concept. In Kali and Salz, Commission found that together with SCPA the merged entity would have a duopoly enjoying dominant position in potash market. Commission based its analysis on mainly a total market share of 60 % and lessening the possibility of competition between the parties due to characteristics of market (transparency of market, homogeneous product, absence of technological innovation), past behavior of parties and particularly on commercial links such as the control of a joint venture, cooperation in an export cartel and long established links regarding the supplies in France .

French government appealed the case with the main plea that neither the wording nor the legal bases of the regulation did not refer to and allow the interpretation of collective dominant position, and therefore the regulation was not applicable to the concept . Court interpreting the Art 2 of the regulation with reference to its purpose and general structure found that, it would not be possible to conclude that the dominant position only held by parties liable to concentration were covered by the regulation. In addition to this, Court stated that the wording of the article does not exclude the possibility of covering the concentrations leading to collective dominance . When literally interpreted the wording of the article just mentions dominant position but does not refer to whether the position should be held collectively or individually (Gonzalez-Diaz, 2003, p.310).

ECJ stated that Merger Regulation should apply to all concentrations with a Community dimension in so far as they are likely, because of their effect on the structure of competition within the Community, to prove incompatible with the system of undistorted competition envisaged by the Treaty. Court's approach was quite teleological in the sense that the objective of Merger regulation ensuring that competition is not distorted through mergers was taken into account (Perez, 1998). Based on both teleological and literal interpretation, Court concluded, collective dominant positions do not fall outside the scope of the Regulation. Accepting the application of the concept, ECJ next defined the concept of collective dominance as

whether the concentration leads to a situation in which effective competition in the relevant market is significantly impeded by the undertakings which together, in particular because of factors giving rise to a connection between them, are able to adopt a common policy on the market and act to a considerable extent independently of their competitors, their customers, and also of consumers.

Whereas in the decision of Italian Flat Glass the concept under Art 82 has been built upon being united and economic links, in this decision the concept has been built upon being able to adopt a common policy in particular due to factors giving rise to a connection between them. In both of the decisions, acting as a single entity seems to be core concept, although expressed in different wordings of being united and adopting the same conduct. Some links or factors are referred in both but there is no explanation or definition, leading to uncertainty regarding what can be assessed as connecting factors or actually whether both expressions mean the same (Bavasso, 1999, p.60). The common features of the concept may be interpreted as a sign for alignment of the concept under Art 82 and Merger Regulation (Stroux, 2000, p. 32).

Structural links has a significant importance in this judgment since the Commission based its finding mainly on the existence of the links. This in the end led Court make interpretation regarding the links (Bishop, 1999, p.39). However, a significant uncertainty lies in the wording in particular when referring to connective factors. It is argued that the test about the correlative factors is not exhaustive (Bavasso, 1999, p. 61). It can be deduced that existence of such links are not necessarily required for the parties to be able to adopt a common policy (Korah, 1999, p.337), since the statement does not read that structural links are essential (Bishop, 1999, p.39). However, what is clear is that the existence of links by themselves are not sufficient for a finding of collective dominance as the Court required that there should be a causal link between the connecting factors, one of which was membership of cartel export, and anticompetitive behavior. Court required a high standard of proof for the finding of collective dominance (Motta, 2000, p.204).

Ysewyn and Caffara argued that, as this was an not inquiry about cartel regarding post behavior but a merger analysis requiring ex ante examination, it may not be relevant to specify a casual link between anti competitive behavior and connecting factors. Rather, from an economic point of view, it may be necessary to assess whether the market structure after concentration would facilitate a tacit collusion (Ysewyn and Caffara, 1998, 470). In fact, Commission analyzed the market characteristics, which facilitate tacit collusion. However, since the finding of dominance was majorly based on the structural links, Court did not make any interpretations regarding interdependence in the market. It is not so clear from the judgment whether finding of collective dominance can be based on high concentration and market structures in the absence of links (Stroux, 2000, p.32). Court's approach is ambiguous about whether the collective dominance concept under the merger regulation would be based on economic theory or not.

Apart from the acceptance of application of the concept, Kali Salz judgment is remarkable for its emphasis on the assessment of collective dominance by Commission. Court mentioned two major points. First of all, it is stated in the judgment that Commission has to make prospective analysis of the concentration on the competition in the reference market, which requires basically an assessment of an economic nature. Commission was given a certain discretion in making this assessment and this discretion should be taken into account at the stage of judicial review. This discretion to a degree is expected since analyzing how the factors facilitating collusion are interacting is a difficult task (Motta, 2000, p. 201). However, by this judgment Court shows that this discretion does not mean acceptance of inadequate analysis by Court. Commission is expected to do better than having a mechanistic approach by relying on checklist of descriptive factors leading to collective dominance (Etter, 2000, p. 129) and turn on to related facts in each case where different factors have different significance in different industries (Whish, 2000). Yet in this case Commission failed to a make coherent competitive assessment. Court found out that Commission had not on any view established to the necessary legal standard that the concentration would give rise to a collective dominant position and upheld the related pleas of the applicants.

As expected after Italian Flat Glass, the application of the concept extended to Merger Regulation extending the power of Commission regarding its new weapon and related discretion. To put in other words, Kali/Salz judgment provided Commission both power and responsibility, requiring a detailed prospective analysis (Bishop, 1999, p.37). It does not seem to be so easy to use this power unless satisfactory analysis by Commission is made. Kali/Salz judgment is quite remarkable in this sense. However, as for the development of concept it does not say something new. The same questions still seem to need clarity.

5. DEVELOPMENT PHASE: FROM STRUCTURAL LINKS TO OLIGOPOLISTIC INTERDEPENDENCE

The judgments of European Courts in Gencor and Maritime Belge cases were in line with the previous judgments in the meaning that adopting a common policy formed the central concept. However, these judgments went beyond the central theme and clarified some of the uncertainties regarding the necessity of links in the finding of collective dominance and inclusion of the oligopolistic interdependence in the context of the concept. Besides, it was understood that the concept of collective dominance developed under Merger Regulation and Art 82 would not have different meanings.

5.1. Gencor /Lonrho Case

Commission did not find the concentration between Gencor and Lonrho through acquiring a joint control of Implats and in the second stage, through Implats, controlling Eastplats and Westplats, compatible with the common market. In its decision Commission concluded that the result of the concentration would be creation of a dominant position in the platinum and rhodium markets. Commission based the finding of tendency towards anticompetitive parallel behavior mainly on market characteristics (product homogeneity, high market transparency, price inelastic demand, moderate growth in demand, mature production technology, high entry barriers mainly), multimarket contacts and structural links, the development of price competition and past behavior of the main market players. Together with this analysis, high level of concentration leading to a total market share of 70-80% in world platinum market and similar cost structures were concluded to lead to creation of oligopolistic dominance. Commission has made a detailed analysis both regarding the economic effects of the concentration and structure of the oligopoly. Commission assessed the market in context of the economic theory while analyzing the likeliness of parallel anticompetitive behavior, or to put in other words tacit collusion (Nicholson and Cardell, 2003, p. 285). Commission's definition of the oligopolistic dominance revealed its application of economic theory:

Similar negative effects which arise from a dominant position held by one firm arise from a dominant position held by an oligopoly. Such a situation can occur where a mere adaptation by members of the oligopoly to market conditions causes anti competitive parallel behavior whereby the oligopoly becomes dominant active collusion would therefore not be required for the members of the oligopoly to become dominant and to behave to an appreciable extent independently of their remaining competitors, their customers and, ultimately, the consumers.

The parties appealed the decision with the plea that Commission wrongly found that the concentration would lead to creation of collective dominance referring to the market analysis done by Commission. Upon the review and assessment of all criteria used in the analysis, CFI found out that Commission had not erred in market analysis and therefore rejected the pleas . For the structural links Court pointed out a link between them and collective dominance. Yet this part of the judgment is crucial in clarifying the concept and the relationship between structural links and establishment of the concept. The parties alleged that Commission did not take account of the case law and thus failed to prove the structural links required for finding of collective dominance. Commission's defense revealed its approach to control of oligopolies. Commission first stated that it did not rely on the existence of economic links in all cases and added that CFI did not restrict the notion of economic links to structural links. Commission emphasized that in it's understanding the notion included the relationship of interdependence which exists between the members of a tight oligopoly. Commission as it did in the Kali/Salz decision, implied that the concept under Art 82 and Merger Regulation need not be the same as a reply to referral to the requirement of structural links in Italian Glass judgment. This brings the question of whether different assessments are needed in the control of oligopolies under different contexts.
CFI in this judgment ended the ambiguity regarding the requirement of structural links for finding of collective dominance. Court stated In its judgment in the Flat Glass case, the Court referred to links of a structural nature only by way of example and did not lay down that such links must exist in order for a finding of a collective dominance to be made. Court continued with the related part of the judgment of Italian Flat Glass case and concluded that nor can it be deduced from the same judgment that the Court has restricted the notion of economic links to notion of structural links referred to by the applicant.

This statement is important for a couple of reasons. First of all, by referring to and Art 86 case, Court implies that the concept is not different under the context of Art 82 and Merger Regulation (Whish, 2000, Fernandez, 2000,Gonzalez- Diaz, 1999, p. 16), which is contrary to the approach of Commission as given above. Secondly, at last Court clarifies that structural links are not required for the finding of collective dominance. Additionally it can be inferred that notion of economic links is a broader concept covering structural links as well (Whish, 2000). Coming to the meaning of economic links other than structural links Court said that

Furthermore, there is no reason whatsoever in legal or economic terms to exclude from the notion of economic links the relationship of interdependence existing between the parties to a tight oligopoly within which, in a market with appropriate characteristics, in particular in terms of market concentration, transparency and product homogeneity, those parties are in a position to anticipate one another's behavior and are therefore strongly encouraged to align their conduct in the market, in particular in such a way as to maximize their joint profits by restricting production with a view to increasing prices. In such a context, each trader is aware that highly competitive action on its part designed to increase its market share (for example a price cut) would provoke identical action by others, so that it would derive no benefit from its initiative. All the traders would thus be affected by the reduction in price levels.

It is remarkable that Court for the first time recognized that oligopolistic interdependence can be an economic link (Withers and Jephcott, 2001) and therefore be regulated under the concept of collective dominance. This extension of notion is what Commission is insisting for years. So at his point finally the approach of Commission and Court coincide. Considering the approach of Court applying the same concept of collective dominance under both Art 86 and Merger regulation as given above, it can be expected that Commission can challenge tacit collusion under Art 82 (Gonzalez- Diaz, 1999, p. 16) given that there is abusive behavior. Large companies operating in tight oligopolistic markets then are expected to have special responsibility of dominant firms (Elliot, 1999). This judgment closes the gap opened by the CFI's judgment in Wood Pulp case (Gonzalez- Diaz, 1999, p. 17).

Court in this statement also gave the definition of oligopolistic interdependence and tacit collusion. This means that the legal concept of collective dominance is identified with the economic concept of tacit coordination when the market is tight oligopoly (Bavasso, 1999, p.63). However, Court implied that collective dominance was not restricted to interdependence in tight oligopolies by saying that

That conclusion is all the more pertinent with regard to the control of concentrations, whose objective is to prevent anti-competitive market structures from arising or being strengthened. Those structures may result from the existence of economic links in the strict sense argued by the applicant or from market structures of an oligopolistic kind where each undertaking may become aware of common interests and, in particular, cause prices to increase without having to enter into an agreement or resort to a concerted practice.

In this judgment Court considered links referred in the case law previously as links in the strict sense in the meaning that they enable the undertakings adopt a common policy (Stroux, 2000, p.35). By this statement, Court one more time emphasized clearly that collective dominance might arise due to economic links or oligopolistic interdependence.

In the end, Court rejected the pleas of the parties and upheld the Commission's decision. It is a significant judgment in respect of the evolution of the concept, particularly covering

oligopolistic interdependence and economic assessment. However, this judgment leads to some other uncertainties. The analysis under merger cases is supposed to cover the assessment of the sustainability of the coordination in the framework of economic theory. That is what is missing in Gencor judgment (Bavasso, 1999, 64).

5.2. Compaigne Maritime Belge Case

Dafra, CMB and CMBT appealed the decision of Commission with the plea that members of Cewal did not hold dominant position jointly. Commission, in its decision, found collective dominance due to membership to two Cewal shipping conference. The members were linked to each other by the Cewal agreement, which created very close economic links . Together they hold a market share of 90 % and there was only one competitor. Parties also alleged that concerted practices of between Cewal members were recycled by CFI for the finding collective dominance. Court first of all stated that it was necessary to analyze the economic links or factors giving rise to a connection both referring to Almelo and France and others vs. Commission. Court, as in the case law, emphasized that if undertakings were linked by agreements, concerted practices or decision of associations within the meaning of Art 81, this would not be sufficient for finding of collective dominance by itself. Court continued

On the other hand, an agreement, decision or concerted practice (whether or not covered by an exemption under Art 85(3) of the Treaty) may undoubtedly, where it is implemented, result in the undertakings concerned being so linked as to their conduct on a particular market that they present themselves on the market as a collective entity vis-à-vis their competitors, their trading partners and consumers.

Cewal agreement was exempted under Art 85(3). This judgment reveals that although an agreement is exempted, still Art 82 may apply if there is collectivity in their presentation and acting. Regarding the concept of collective dominance Court stated that

The existence of a collective dominant position may therefore flow from the nature and terms of an agreement, from the way in which it is implemented and, consequently, from the links or factors which give rise to a connection between undertakings which result from it. Nevertheless, the existence of an agreement or of other links in law is not indispensable to a finding of a collective dominant position; such a finding may be based on other connecting factors and would depend on an economic assessment and, in particular, on an assessment of the structure of the market in question.

It is so clear from this decision that agreements can be used as a link connecting the undertakings and yet there may be other kind of links. Up to this point, the judgment is not different from the case law under Art 82. What is remarkable is that by referring to assessment of structure of markets, ECJ in a way recognized that oligopolistic interdependence could establish the links required for connection between the undertakings (Stroux, 2000, p. 126) In the judgment of Gencor case, it was clarified that collective dominance could arise due to the market structure under Merger Regulation. This time, in the judgment of Maritime Belge case, same issue was clarified for Art 82. Although the finding of collective dominance was based on the agreements and the market in question was not oligopolistic market (Richardson and Gordon, 2001, p.418), it was crucial that ECJ went further in its interpretation and covered the gap.

Regarding the establishment of collective dominance, ECJ in this judgment identified a three-stage test covering collective position, dominant position and the abuse of such a position. by saying that for the purposes of analysis under Art 82 of the Treaty, it is necessary to consider whether the undertakings concerned together constitute a collective entity vis-à-vis their competitors, their trading partners and consumers on a particular market. It is only where that question is answered in the affirmative that it is appropriate to consider whether that collective entity actually holds a dominant position and whether its conduct constitutes abuse. The point is that it may not be applied as expected in practice due to the fact that some of the factors leading to finding of collectivity and dominance may be same such as concentration rates, barriers to entry or sunk costs. Therefore, it may not be easy to separate the test (Withers and Jephcott, 2001).

6. CLARIFICATION PERIOD: Collective Dominance Associated With Tacit Collusion

Commission's controversial decision in Airtours case (Motta, 2000, p.207) has covered and pointed out new gaps in oligopolistic markets under merger control and has led to so many discussions. Inconsistency in the approach of Commission while applying economic theory gave the Court the opportunity to make a clear formulation of the concept. In its related judgment, CFI first of all clarified the concept of collective dominance particularly under the Merger Regulation and following in the context of reforming merger regulation all the gaps were filled. In spite of the views arguing that Airtours decision is nothing but a summation and distillation of and from previous cases, in particular, Kali and Salz and Gencor (Nicholson And Cardell, 2003, Montag and Bonin, 2003, p.325, Nikpay, 2003, p.193), it is still remarkable for leading to clarification.

6.1. Airtours Case

Commission found the concentration between Airtours and First Choice would lead to creation of collective dominance in the short-haul package holidays of the merged undertaking and other two leading tour operators, namely Thomson and Thomas Cook.

Commission made a detailed analysis of market characteristics (product homogeneity, volatile demand, price sensitivity, cost structures, transparency, interdependency, commercial links) and concluded that most of them made the market conducive to oligopolistic dominance. Commission stated that interdependencies between the oligopolists would make it rational for the oligopolists to restrict output . When assessed with the combined market share of around 83% post merger, the effect of fringe on competition and past structure of the market, Commission concluded that the merger would create collective dominance.

Commission referred to Gencor/Lonrho case, but interestingly not to the judgment of the Court, when defining the concept of collective dominance. Commission repeated its statement in Gencor case that mere adaptation to market conditions may cause anticompetitive behavior whereby the oligopoly becomes dominant and active collusion is not a perquisite for finding of collective dominance. Commission continued with one of the most controversial statements of the decision saying that

Furthermore, -contrary to the apparent view of Airtours it is not a necessary condition of collective dominance for the oligopolists always to behave as if there were one or more explicit agreements (e.g. to fix prices or capacity, or share the market) between them. It is sufficient that the merger makes it rational for the oligopolists, in adapting themselves to market conditions, to act individually in ways which will substantially reduce competition between them, and as a result of which they may act, to an appreciable extent, independently of competitors, customers and consumers.

Up to Airtours decision, in line with the economic theory, in the case law regarding collective dominance it has been accepted that firms being aware of their interdependence would raise their prices jointly to an anticompetitive level without actively colluding. Thus, the focus was on jointly exercising market power (Christensen and Rabassa, 2001, p.228) by being member of oligopoly firms are dominant. In this decision, Commission radically diverted from this economic approach (Niels, 2001, p.169, Nicholsan and Cardell, 2003, p.291) and alleged that there may be unilateral effects of mergers, which lead firms acting individually. It is known that mergers may lead to both unilateral and coordinated effects in the economic sense, so depending on the facts of the case, Commission may have done a plausible economic analysis pointing out the unilateral effects and it would have been the right decision to block the merger (Motta, 2000, P. 207) However, considering that merger regulation only covers unilateral effects of single dominance based on the dominance test, the question of whether the concept of collective dominance is appropriate to deal with unilateral effects arises, blurring the traditional distinction between unilateral and co-ordinated effects (Nicholson and Cardell, 2003, p.299).

Another diversion from economic theory takes place in the requirement for retaliation and punishment mechanisms. As mentioned above in section 3, the fact that some market characteristics would make the market conducive to interdependence is not sufficient to conclude about the finding of collective dominance. It is required that it should be rational to choose not to compete for the players in the market and in addition, this coordination should be sustainable in terms of monitoring each other and retaliating and punishing in case of cheating. However, Commission in this decision stated that it Nor does it regard that a strict retaliation mechanism, such as that proposed by Airtours in its reply to the Statement of Objections, as a necessary condition for collective dominance in this case; where as here, there are strong incentives to reduce competitive action, coercion may be unnecessary. Commission continued with a conflicting finding that it agrees that there is a scope for retaliation, which will only increase the incentives to behave in an anticompetitive parallel way . So on one hand, Commission did not see retaliation mechanism as a component of collective dominance but at the same time still referred to it. Commission and Court, although particularly based their approach on economic theory of tacit collusions in previous cases, did not mention about the issues regarding the sustainability of the collusion, and yet they were criticized after Gencor. The approach of Commission in Airtours being inconsistent with previous decisions and restricting the use of economic theory only to oligopolistic interdependence showed that it used its discretion widely, considering that it had always an economic approach in assessing the effects of mergers. The elements of the so-called checklist are supposed to be used in the analysis of identifying the likeliness and the sustainability of the tacit collusion. However, Commission seemed to detach the checklist from its related theory (Nicholson and Cardell, 2003, p. 293). So another main question arises: Is it required that tacit collusion is sustainable under the legal concept of collective dominance

CFI's judgment by answering both of the questions clarified the concept of collective dominance and yet developed a comprehensive formulation (Nicholson and Cardell, 2003, p. 295). Court stated that

a collective dominant position may thus arise as a result of concentration where, in view of actual characteristics of the market and of in its structure that the transaction would entail, the latter would make each member of the dominant oligopoly, as it becomes aware of common interests, consider it possible, economically rational, and hence preferable, to adopt on a lasting basis a common policy on the market with the aim of selling at above competitive prices, without having to enter into an agreement or resort to a concerted practice within the meaning of Article 81.

As for the part of the statement regarding adopting common policy and being anticompetitive without colluding, Court did not say something new, just distilling and summing the previous cases. However, what is novel in this statement and leads to clarification is that for the first time Court explicitly expressed that not only the market characteristics and structure should make tacit collusion likely but also the oligopolists should prefer to do so that they could maximize their profits and sustain this coordination on a lasting basis. Comprehending this approach, Court defined three conditions for the sustainability of tacit collusion.

First, each member of the dominant oligopoly must have the ability to know how the other members are behaving in order to monitor whether or not they are adopting the common policySecond, the situation of tacit co-ordination must be sustainable over time, that is to say, there must be an incentive not to depart from the common policy on the marketThe notion of retaliation in respect of conduct deviating from the common policy is thus inherent in this condition. Third the Commission must also establish that the foreseeable reaction of current and future competitors, as well as consumers, would not jeopardize the results expected from the common policy.

Sustaining tacit coordination is in fact a trade off between anticompetitive behaviors and thus profits in the long term, and competition on merits and thus short term profits (Gonzalez-Diaz, 2003,p.314). Standard of proof required for the Commission is to show that a credible punishment mechanism exists although it should not be explained in detail. Court by this statement also shows its approach regarding the use of checklist. Checklist should not be applied in a mechanistic approach (Overd, 2002, p.376). Collective dominance concept would have been too broad covering all oligopolies if only based on interdependence and likeliness of tacit collusion.

This is the first judgment of the Court where it annulled the decision of Commission prohibiting a merger. Thus this decision brings issues about the discretion enjoyed and accountability. Court is willing to hold account of Commission (Nikpay, 2003, p.193) by requiring heavy and conclusive burden of proof. It is accepted in economic theory that it is very difficult to distinguish between natural functioning of a tight oligopoly and oligopolistic dominance, therefore drawing a certain line between two. However, from the judgment of CFI in Airtours case it is evident Commission should not confuse (Stroux, 2002).

Although the Commission tried to extend the concept of collective dominance beyond the boundaries of tacit collusion, clarification by the Court implied that mergers with unilateral effects but not creating or strengthening dominance, couldn't be dealt under the concept and Merger Regulation (Montag and Bonin, 2003, p.328). Thus, the concept of collective dominance is limited to co-ordinated effects of mergers (Nicholson and Cardell, 2003, p. 285) What the Commission was trying to do perhaps to use this case as an opportunity to point out the gap inherent in the Merger Regulation through this controversial decision. However, its seems that the lacuna cannot be closed by extending the concept of collective dominance (Nicholson and Cardell, 2003, p.300) but with a change in the merger regulation if all mergers with adverse effects on welfare to be prohibited (Motta, 2000, p.207), which is an approach closer to US approach requiring the test of substantial lessening (Nicholsan and Cardell, 2003, p. 285). The judgment of CFI in this case seems to provide a powerful corrective move to the law closer to the US model and standard economic theory (Nicholson and Cardell, 2003, p. 286). However, it is important to note that Court did not make a rule about the unilateral effects or how to apply ECMR to non-collusive oligopolies (Gonzalez-Diaz, 2003, p.312, Nikpay, 2003, p.202).

6.2.Change in Merger Regulation and Guidelines on the assessment of horizontal mergers

As foreseen in the literature following the Airtours decision, Commission made a reform in the Merger Regulation changing the test of dominance to substantial lessening of competition. This amendment in the regulation and following the Guidelines on the assessment of horizontal mergers both closed the gap related to unilateral effects of mergers that can arise in oligopolistic markets and provided detailed insight to the assessment of collective dominance based on the case-law and economic theory.

In framework of the test of substantial lessening of competition, horizontal mergers would likely to have two effects in the market, namely non-coordinated and coordinated effects. Noncoordinated effects cover both mergers creating or strengthening single dominance and mergers in oligopolistic markets involving the elimination of important competitive constraints that the merging parties previously exerted upon each other together with a reduction of competitive pressure on the remaining competitors whereas the coordinated effects cover mergers creating or strengthening collective dominance.

Commission provided a detailed guideline for the finding of collective dominance. The approach, based on case law and in line with economic theory of tacit collusion , provides a comprehensive framework. The oligopolistic markets are defined as markets where the firms would consider it possible, economically rational and hence preferable, to adopt on a sustainable basis as a course of action on the market aimed at selling at increased prices. This definition is very close to the one in the judgment of Airtours case as can be remembered. The possibility, rationality and sustainability of the coordination provide the main framework for finding of collective dominance. For the possibility of the coordination, Commission will take into account common understanding on the terms of coordination and available relevant information on the market characteristics including structural features and past behavior of the firms. As for assessment of the rationality and sustainability of the coordination, Commission will apply the conditions set by CFI in the judgment of Airtours case, regarding transparency of market and monitoring deviations, deterrent mechanisms and reaction of outsiders. Commission described these three conditions in detail.

Thus, it is possible to conclude that guidelines provide significant clarification and predictability regarding the finding of collective dominance under Merger Regulation. Although the guidelines seems to be the summary and distillation of previous case law and application of economic theory of tacit coordination, it is crucial that it covers every element or factor related to the finding of collective dominance. Thus, nothing is left outside. The guideline seems to close the gaps and provide answers to all the questions left open before during the development of the concept.

7. Conclusion

Due to the interdependence between the players, oligopolistic markets may lead to anticompetitive parallel behavior of the firms. The prices may rise to an anticompetitive level without an actual coordination of undertakings in the meaning of agreements or concerted practices under Art 81. Once the players recognize that their pricing decisions are dependent on each other, they may choose not to compete, and coordinate their behaviors in a way to set prices above competitive levels. Commission had no direct legal instruments to regulate the emergence of this tacit collusion in the oligopolistic markets. Thus, the issue constituted a gap in the Community Competition Law.

Commission developed a new legal concept under Art 82 to be able to fill this gap: Collective Dominance. For some time, ECJ rejected the development of the concept under Art 82. However, with the acceptance of CFI in Italian Flat Glass in 1992 things started to change.

Commission's focus when designing the legal concept of collective dominance was mainly on one core concept, acting as a single entity, which results in adoption of common policies in the market. Commission, in this framework, placed the oligopolistic interdependence under this concept based on the reasoning that this interdependence in the tight oligopolies may lead to adoption of the same policy of fixing prices at anticompetitive level. However, the facts of the cases for some time, particularly under Art 82, did not allow the Commission to find oligopolistic dominance due to market structure. Commission had to base its finding of collective dominance on factors other than market structure such as structural links. It insistently emphasized that this finding may be due to oligopolistic interdependence. This was the case for Italian Flat Glass decision for instance. The emphasis was quite important in the sense that it showed the ambitious intention of the Commission to cover the gap. The acceptance of application of collective dominance under Art 82 by CFI in Italian Flat Glass had, given the Commission the opportunity to regulate tight oligopolies under a legitimate framework although CFI did not refer to oligopolistic interdependence as a way of being united. However, Commission had to wait for some time for inclusion of interdependence under the concept.

In Italian Flat Glass, Court defined the concept as being united vis-à-vis other competitors in the market as a result of economic links existing between the undertakings. Although it was clear from the decision that being united was the core concept, it was quite ambigious with regards to the means of unification. The question of what kind of economic links could be required to prove that undertakings collectively hold a dominant position was not clear.

Following in the judgment of Kali Salz, the Court accepted the application of the concept under Merger Regulation where test of dominance is the main concept. Commission based its finding of collective dominance on economic assessment of the market including market characteristics leading to tacit collusion and commercial links. However, Court again did not refer to oligopolistic dominance and defined the concept as adopting the same policy due to in particular correlative factors. The application of concept extended to Merger Regulation but as for the content of the concept nothing new was said. Besides, the wording in particular led to more ambiguity regarding the necessity of links for the establishment of collective dominance.

The judgment in Gencor case has been a breakthrough in the sense that Court for the first time accepted that oligopolistic interdependence could lead undertakings to hold a dominant position. Finally, the approach of the Commission and the Court coincided and the gap was closed. However, Court emphasized that collective dominance could be found based on structural links or market structure, meaning that the concept was not only associated with tacit collusion. Court also clarified the ambiqity regarding the necessity of links for the finding of concept saying that links were not required for the finding of dominant position.

Gencor judgment by covering the oligopolistic interdependence drew attentions to the assessment of mergers in oligopolistic markets. Collective dominance is a legal concept identified with the economic theory of tacit collusion when the market is tight oligopoly. Economic theory requires that the merger would make tacit collusion only likely of but also preferable and sustainable. Therefore, a through analysis of markets should include both characteristics of market and product, which make market conducive to tacit collusion but also monitoring and deterrent mechanisms that would prevent cheating and enable the oligopolists to detect and punish the deviations. However, although Commission covered the first part of this analysis, it did not refer to retaliation mechanisms. This approach was criticized for the missing part.

Following the Gencor judgment, in judgment of Maritime case Court also accepted the oligopolistic interdependence under Art 82. This showed the parallel and aligned development of the concept under two legal instruments, since Court referred to tacit collusion although the finding of dominant position was based on an agreement in this case.

The decision of Commission in Airtours case was so controversial that it had given the Court the opportunity to clarify almost all the uncertainties regarding the concept. Commission in its decision stated that retaliation mechanisms were not required for tacit collusion to occur. This divergence from economic theory was crucial since the Commission was supposed to base its finding on economic theory as mentioned above. Besides, Commission tried to extend the concept of collective dominance to unilateral effects of mergers. Single dominance was used to be associated with unilateral effects. However, Commission pointed out in an indirect way that mergers may have unilateral effects in oligopolistic markets and they were not covered by Merger Regulation, leading to occurrence of another gap. Commission attempted to use collective dominance for individual acts.

Court in its judgment clarified that sustainability of tacit collusion was of great importance and stated three conditions for the assessment of the sustainability. Besides, collective dominance was associated with co ordinated effects. Although Court did make specific rule about the unilateral effects, the judgment implied that the unilateral effects of mergers in oligopolistic markets cannot be examined under this concept.

The reform in Merger Regulation changing the test of dominance to susbstantial lessening of competition and followingly the guidelines prepared by the Commission on horizontal assessment of mergers both developed a comprehensive approach to analyze tacit collusion and closed the gap regarding the unilateral effects. Commission in the guideline provided a detailed analysis for the finding of collective dominance based on the economic theory and case law. In this sense the concept of collective dominance is associated with tacit collusion under merger regulation. There is no reason that the criteria developed for mergers can be used in Art 82 cases as well. Although the collective dominance concept is not limited to tacit collusion, Commission seems to close the gap and be able to control tight oligopolies in a comprehensive way.

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