Jurisdiction - Malaysia
Reports and Analysis
Malaysia – Competition Commission Issues Guidelines On Chapter 2 Prohibition.

17 August, 2012

 

INTRODUCTION

 
The Malaysian Competition Commission (“MyCC”) has released its Guidelines on Chapter 2 of the Competition Act 2010 (“Chapter 2 Guidelines”), following its public consultation on the draft Chapter 2 Guidelines between 15 May 2012 and 15 June 2012.
 
Chapter 2 of the Competition Act 2010 (“Act”)prohibits an enterprise from engaging, whether independently or collectively, with other enterprises, in any conduct which amounts to an abuse of a dominant position in any market for goods or services in Malaysia (“Chapter 2 Prohibition”).
 
The Chapter 2 Guidelines provide the industry with further guidance on the approach which will be taken by MyCC in determining whether an enterprise is dominant, and some illustrations on the types of conduct that may constitute an abuse of dominance.
 
This update summarises the key features of the Chapter 2 Guidelines (which remain largely unchanged from the draft guidelines) and highlights some pertinent implications for businesses.
 
KEY POINTS
 
The determination of whether an enterprise has contravened the Chapter 2 Prohibition involves the following two-stage analysis:
 
(a) the enterprise concerned must be dominant in a relevant market in Malaysia; and
(b) there must be an abuse by that enterprise of its dominant position. 
 
Definition of a “Dominant Position”
 
Section 2 of the Act defines a “dominant position” as “a situation in which one or more enterprises possess such significant power in a market to adjust prices or outputs or trading terms, without effective constraint from competitors or potential
competitors.”
 
It is noteworthy that the Chapter 2 Prohibition applies to both individual and collective dominance. This means that it is possible that where two or more separate enterprises are acting similarly in a market, and thereby exercising significant market power together to exclude equally efficient competitors, these enterprises may be in breach of the Chapter 2 Prohibition. It is not clear however, what factors MyCC will take into consideration when assessing whether two separate enterprises are “acting similarly in the market” in establishing an abuse of collective dominance.
 
Determination of dominance
 
In determining whether an enterprise is dominant, the relevant market must first be defined, typically by reference to the product dimension and the geographic dimension of the market.
 
MyCC has issued Guidelines on Market Definition which can be found on its website: http://www.mycc.gov.my/Web/Home.aspx. 
 
Market shares are not conclusive evidence of an enterprise’s dominance
 
In the finalised Chapter 2 Guidelines, MyCC maintains its position that as a starting point, it will consider that an enterprise with a market share above 60 per cent is indicative of such enterprise’s dominance. In turn, the calculation of the market shares will depend on the relevant market definition. 
 
However, MyCC has made it clear that market shares alone will not constitute conclusive evidence of whether an enterprise is dominant in a relevant market. The Chapter 2 Guidelines explain that market shares are generally only indicative of the existing competition faced by an enterprise. 
 
MyCC indicated that it may look to a few sources for evidence of market shares, including direct data provided by the enterprises in the relevant market, information from trade associations and market research reports. MyCC will typically consider market share information based on several methods of calculation, eg sales value, sales volume or production capacity. In assessing whether an enterprise is dominant,
 
MyCC will consider both the existing and potential competition faced by the enterprise concerned, as well as any other relevant constraints faced by such enterprise.
 
Market power
 
An enterprise will be considered dominant if it is found to have “considerable market power”. In this regard, the Chapter 2 Guidelines sets out the guiding principle as follows:
 
“The ability of an enterprise to price well above the competitive level for a sustained period or the ability to actually drive an equally efficient competitor out of business provides evidence that the enterprise has considerable market power.”
 
In practice, MyCC will have regard to a range of competitive conditions in the relevant market, such as:
 
  • number of competitors in the relevant market. Where an enterprise is the only enterprise in a market, such enterprise will likely be considered as occupying a dominant position because there are no other competitors;
  • mode of competition between competing enterprises, ie whether they are competing on product features, prices, etc.; 
  • ease of entry into the market, ie if the extent of barriers to entry is low, an enterprise that has a current market share of 100% may be considered not dominant as the threat of new entry will prevent the enterprise from charging high prices or drive an equally efficient competitor out of the market. Some barriers to entry include economies of scale and scope, regulated entry, limited access to necessary inputs or distribution outlets, network effects, high sunk costs or even past conduct of the incumbent;
  • degree of product differentiation, ie the more differentiated the competing products are, the less useful market share figures are as a guide to market power;
  • likely response by buyers to price increases, ie an enterprise may have greater market power by virtue of being able to raise prices more easily for its product that has a “musthave” status (ie consumers of such product will not switch to ot her competitor products due to perceived status or due to technical reasons);
  • degree to which innovation drives competition, ie an enterprise with high current market share may be displaced quickly by a new product, while a new product with low current market share may have considerable market power moving forward;
  • constraints imposed by buyers with significant buyer power, ie where buyers have bargaining power that offsets any seller power. For example, supermarket chains or media outlets may exercise considerable buyer power over grocery suppliers and program suppliers, and this may offset or diminish the seller enterprise’s market power; and
  • economic regulation imposed by the government (such as price regulation), ie whether an enterprise still has any  market power over other dimensions of competition despite government regulation. 
 
The above factors are non-exhaustive and ultimately, MyCC will conduct its assessment of whether an enterprise is, or two or more enterprises are collectively, dominant on a case by case basis. 
 
Conduct which amounts to an abuse of dominance
 
The Chapter 2 Guidelines explain that there are two main types of abusive conduct which may amount to an abuse of dominance in contravention of the Chapter 2 Prohibition:
 
(a) exploitative abuse where an enterprise maintains price above the competitive level for some time without concern over its customers or competitors; and 
(b) exclusionary abuse where an enterprise dictates the level of competition in a market by preventing efficient new entry or harming existing equally efficient competitors.
 
Exploitative conduct
 
Whereas the Chapter 2 Guidelines provide that exploitative conduct may amount to an abuse of dominance, and that it typically takes the form of excessive pricing, MyCC has indicated that it may only be concerned with excessive pricing where there is no likelihood that market forces will reduce the level of dominance in a market.
 
Excessive pricing may occur where, for instance, a dominant enterprise sets a high price to exploit consumers and its resulting excessive profits are not a reward for its innovation.
 
As a matter of principle, MyCC has stated that in determining whether prices are excessive, it may consider the actual price set in relation to the costs of supply and the profitability of the dominant enterprise. Ultimately, however, the criteria for assessing whether prices are excessive will vary between markets.
 
Exclusionary conduct
 
It is heartening to note that MyCC has confirmed that it will adopt an “effects-based” approach in assessing whether an enterprise may be abusing its dominant position.
 
MyCC has highlighted that in examining the effects on competition, it is the impact on the competitive process, rather than the effects on competitors, which is the relevant consideration. The rationale behind this approach is that effective competition drives inefficient enterprises out of the market.
 
Therefore, a dominant enterprise should not be prohibited from engaging in competitive conduct that benefits consumers even if inefficient competitors are “harmed”.
 
In general, when assessing whether the effect of exclusionary conduct amounts to an abuse, MyCC will apply the following tests:
 
(a) Does the conduct adversely affect consumers?
(b) Does the conduct exclude a competitor that is just as efficient as the dominant enterprise?
 
As with the assessment of exploitative conduct by dominant enterprises, the assessment of whether exclusionary conduct amounts to an abuse of dominance will depend on the particular facts of each case.
 
Some (non-exhaustive) examples of exclusionary conduct provided by MyCC in the Chapter 2 Guidelines are: 
 
  • predatory pricing, ie a dominant enterprise is charging below cost for the purpose of driving other competitors out of business;
  • price discrimination that is unrelated to underlying costs, ie where a dominant enterprise segregates its customers into different groups so as to charge customers lower prices where there is more competition and cover its losses by charging more to those customers experiencing less competition;
  • exclusive dealing where a dominant seller has foreclosed competition by establishing exclusive dealing arrangements with buyers, thereby preventing its competitors from selling their products into the market; 
  • loyalty rebates and discounts where a dominant enterprise forecloses a significant portion of the market by offering discounts or rebates on the basis that customers buy at least the bulk of their requirements from the enterprise;
  • refusal to supply, ie while MyCC has clarified that generally enterprises are free to deal with whomever they choose, where a dominant enterprise refuses to grant its rivals access to necessary infrastructure (ie essential facilities) to supply certain products or services, this may amount to abuse; 
  • buying up scarce intermediate goods o resources which has the effect of increasing the cost of production to the dominant enterprise’s competitors or prevent them from producing at all; and 
  • bundling and tying may in certain cases amount to abuse. MyCC has provided the following helpful examples of tying and bundling which may amount to an abuse of a dominant position: eg where a dominant enterprise refuses to sell a product unless the buyer also buys another unrelated product (tying); and where unrelated products are sold together at a lower price than separately, the result of which the dominant enterprise (being dominant in one market) is able to leverage its dominance in one market to obtain market power in a separate market (bundling).
 
Abuse of dominance may occur in a separate market
 
It is important to note that it is not necessary for the abusive conduct to take place in the same market in which the enterprise is dominant. An enterprise that is dominant in one market in Malaysia can, nevertheless, be found to be abusing its dominant position in a separate market.
 
Justifiable conduct
 
Notwithstanding the above, the Act provides that enterprises will not be prevented from “taking any step which has reasonable commercial justification or represents a reasonable commercial response to the market entry or market conduct of a competitor”. The Chapter 2 Guidelines, however, make it clear that the onus lies with the dominant enterprise to prove that its conduct is premised on reasonable commercial justification or a reasonable commercial response.
 
Non-exhaustive examples of what MyCC considers to be reasonable commercial justifications include:
 
  • refusing to sell to a buyer who has not paid for past purchases;
  • refusing to grant access to a dominant enterprise’s infrastructure that is already being used to capacity;
  • offering a loyalty rebate that is related to the reduced costs of supplying a particular customer; and
  • meeting a competitor’s price even though the price may be below costs (for the short term).
 
CONCLUDING REMARKS
 
The Chapter 2 Prohibition under Malaysian competition law is the other key competition prohibition under the Act, apart from the prohibition against anti-competitive agreements (“Chapter 1 Prohibition”). MyCC’s Guidelines on the Chapter 1 Prohibition were published earlier in May this year.
 
With the release of the finalised Chapter 2 Guidelines, the industry is now provided a more holistic understanding on the manner in which MyCC will administer the Act to protect the competitive process for the benefit of businesses, consumers and the economy.
 
The Chapter 2 Prohibition may be particularly challenging for businesses to comply with as the internal review process will have to involve assessment of the relevant market(s) in which the businesses operate before they can determine whether there is any risk of an abuse of a dominant position.
 
As a useful indicator, a business may wish to start its internal review process by focusing on products whereby: (a) it has about 60 per cent market share based on its current understanding of the product market; or, (b) it is the market leader.
 
After a business has identified those products whereby it may have a dominant position, the next step is to assess whether it is involved in any of the potentially abusive conduct(s) listed above. If it is or it is unsure, it would be useful for the business to engage a competition law expert to undertake a more detailed assessment.
 
Ultimately, the onus is on the businesses to ensure that their commercial practices comply with the Malaysian competition law.
 
REFERENCE
 
Please click here to access MyCC’s Guidelines on the Chapter 2 Prohibition.
 

 

 

For further information, please contact:

 

Cavinder Bull, Partner, Drew & Napier

[email protected]

 

Lim Chong Kin, Partner, Drew & Napier

[email protected]

 

Ng Ee KiaPartner, Drew & Napier

[email protected]

 

 

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