Lithuanian Railways: the most straightforward abuse case ever?
On Monday, the European Commission announced its decision to fine Lithuanian Railways more than 27 million for abusing its dominant position. The practice itself is remarkable: the company dismantled 19 km of railway connecting Lithuania and Latvia to prevent a major customer from using the services of a competitor.
I welcomed the decision for two reasons.
It adds to the topicality of the seminar on network industries that I give in Bruges (and which, coincidence, I presented last Friday). I cannot wait to start.
More importantly, the information available on the case suggests that Lithuanian Railways may very well be part of a rare breed of practices: those that serve no purpose other than the elimination of competition. It would be great if a body of decisions concerning such practices developed.
Article 102 TFEU enforcement is controversial because the vast majority of potentially abusive practices have ambivalent effects on competition: they are capable of having both pro- and anticompetitive effects. Sometimes it is even trickier: the very effect that is potentially problematic is what makes the practice pro-competitive (think of combining two features in a single product).
But there are practices out there that are not capable of having pro-competitive effects or, more generally, that cannot be plausibly explained as a means to enhance competition.
For these practices, the ‘by object’ label is entirely justified. When a practice serves no purpose other than the elimination of competition, there is no reason to require evidence of anticompetitive effects on a case-by-case basis. This is a point that the Commission made in the Guidance, and I agree.
Examples of conduct of this kind? Pricing below average variable costs. Doing so is in principle irrational for a firm. Thus, the only plausible explanation for the conduct is that it is part of a plan to drive a rival out of the market.
I struggled to think of other examples of practices of this kind (besides that of a company blowing up a rival’s plant, which is a classic). Now Lithuanian Railways potentially provides a wonderful one (I have to say nothing similar ever crossed my mind).
It is not obvious for me to see, prima facie, how dismantling a railway connection can be plausibly explained on efficiency grounds. It is an Aspen Skiing sort of situation. And I look forward to the details of the decision (i.e. how the absence of a pro-competitive rationale for the behaviour has been established).
In this respect, the case appears to be different from others involving the leveraging of a dominant position. For example, while vertical integration (via organic growth or via a merger) can foreclose upstream and/or downstream rivals, we know that it can also have pro-competitive effects. What are exactly the pro-competitive effects of dismantling capacity in the circumstances of this case?
Similarly, I believe there is a clear difference between Lithuanian Railways and the famous ‘strategic underinvestment’ decisions in the energy sector. I fail to see why it would be an abuse for a dominant firm not to invest in capacity to accommodate (read: subsidise) rivals. But I certainly see how removing existing capacity to hinder competition can be in breach of Article 102 TFEU.
I look forward to your comments on the above (in particular, this time around, those of economists!).
Chillin'Competition 
I guess the only thing that comes to mind is if the railway company gets in trouble if they simply leave that infrastructure there to rust. If the choice is between a one-off expenditure to rip out the tracks or an annual expenditure on (minimal) maintenance, the former may well be the cheaper option.
Also amazing about this case, courtesy of MLex: Apparently the railway company offered, by way of remedy, to put the track back using EU money (i.e. regional funds, etc.) they still had lying around. Unsurprisingly, the Commission didn’t think that was such a good idea.
martinned
5 October 2017 at 5:20 pm
Great story! Thanks a lot, Martin. It will work wonderfully in the classroom!
Pablo Ibanez Colomo
6 October 2017 at 8:36 am
There are apparently photographs of the land pre and post-railway. I hope the Commission could put the ‘before’ and ‘after’ photos in the decision….they would be a useful teaching aid. A case where would one have photographic evidence of abuse of dominance!
profalanriley1
11 October 2017 at 3:17 pm
Thanks for this nice case! I’m not sure l, though, why economists are invited to comment in particular given that this is a by object case and that’s where simple legalistic reasoning suffices, no need for effects and capabilities and all that.
Hans
5 October 2017 at 5:55 pm
Indeed, why should a by object case be up for comments by economists?
Weeta
5 October 2017 at 11:32 pm
From an economic perspective, the actions by Lithuanian Railways (LR) might be quite reasonable, and the case might not be as straightforward as it looks at the first glance. The disputed rail strip to Latvia was 19 km long, and it badly needed a repair, which cost around 10 m EUR. Without the repair, the rail track was no longer safe to use, so LR decided to dismantle it. There was another rail route to transport the fuel to Latvia , though longer by some 150 km, and LR benefited from this longer transportation because the longer transportation distance the bigger revenues for LR.
However, LR argument might go like this: why would I have to spend my money on the infrastructure and let the competing Latvian railways company benefit from it? From a business rationale of LR, this is not the most sensible thing to do. It might be also an efficiency argument there too, e.g., too little traffic goes there via this strip of 19 km, and 10 m EUR to spend on its repair is not economically reasonable.
I think the problem here is more of a systemic nature, i.e., non-interest of the incumbent operator LR to invest in infrastructure, which he runs. The case to me looks not that much of a “clearest ever” case of abuse “by object” but rather as a good example of the competition problems created by having the track operator and infrastructure owner / manager in the same hands.
Sarunas Pajarskas
6 October 2017 at 7:37 am
Thanks, Sarunas! This is exactly the sort of comment to which I was looking forward. And I am sure you persuaded Hans and Weeta that economic analysis is crucial in supposedly ‘by object’ cases (just think of Cartes Bancaires).
Sarunas: you seem to make two main arguments: (i) that Lithuanian Railways, vertically-integrated, had an incentive to keep the business for itself, instead of allowing rivals to compete and (ii) that dismantling the railway link was objectively justified.
On the first point, I am not sure I am persuaded. What you seem to be arguing is that, indeed, the objective purpose of the behaviour was to eliminate competition from the (Latvian) operator and increase its profits at the expense of a rival. In other words, that the behaviour had a restrictive object. This is another way of making the same point I was making. It certainly makes business sense for a dominant company to eliminate competition (profits can be expected to go up), but this does not mean that that doing so should not be subject to Article 102 TFEU.
On this first point, the key question is whether this case is different from other cases involving vertical integration and leveraging. I see the pro-competitive rationale in a case like Commercial Solvents, Windows Media Player or Intel/McAfee, but I struggle to think of one here.
On the second point: the Commission press release explains that Lithuanian Railways did not provide an objective justification. We will have to wait and see, but I presume the issues you mention will have been discussed in the decision.
Thanks again!
Pablo Ibanez Colomo
6 October 2017 at 8:51 am
Thanks, Pablo, for a feedback. I do not know many details of the case, yet I’d like to further comment before the EC decision is published, to the extent of my knowledge of the facts.
I’m not sure about LR having had an objective purpose to eliminate competition from the Latvian operator. The Latvian operator did not operate physically in the Lithuanian territory. It was only LR that was and still is operating in Lithuania. The Latvian operator takes over the cargo on the Latvian-Lithuanian border, and there is little difference for the Latvian Railways whether it takes over the cargo at the point of the dismantled track, or at another border point. It was not the Latvian operator who complained in this case. It was the Lithuanian refinery Orlen who was hurt, because the fuel, to reach the Latvian ports (Riga, Ventspils) for exports, had to be transported longer distances, which made the exported fuel more expensive and less competitive abroad.
So, the real victims in this case were the refinery Orlen, and, maybe, to some extent, Latvian ports, because some of the fuel, instead of reaching the Latvian ports, now was exported through the Lithuanian port Klaipeda to save costs by Orlen.
Therefore, in my understanding, Lithuanian Railways only wanted to just earn more money from a longer route to reach Latvia. It was not so much about wanting to lessen competition from the Latvian railway operator. They do not actually compete in each other’s territories.
Sarunas Pajarskas
6 October 2017 at 10:40 am
Thanks again, Sarunas! It is great to exchange views.
We will have to wait for the decision, but the press release explains that the case has a clear exclusionary angle (and not purely exploitative, as you seem to suggest).
In particular, the Commission explains that the section was dismantled after Orlen ‘considered redirecting its freight from Lithuania to Latvia by using the services of another rail operator’, and the Commissioner is quoted as saying that the behaviour sought ‘to penalise competitors’ (as opposed to customers).
Pablo Ibanez Colomo
6 October 2017 at 11:30 am
You suggest that such “naked” exclusionary conduct is rare. Aside from burning down factories and a US gangster murdering his competitors, there is also a famous US example involving Alcoa, which paid some electric utilities (from whom it did not buy electricity) not to sell electricity to other competitors. Krattenmaker and I called these naked “exclusionary rights.” And there is the US Tobacco case where the defendant ripped out the racks used by its competitor at retailers. There is also the case of lying to patent authorities in order to get a fraudulent patent, which will exclude competitors. There is also the case of a vertically integrated dominant sawmill buying more logs than it needs from independents in order to raise the costs of it competitors by more than it raises its own average costs. The clearest example would be when he lets the excess logs rot.
But the most interesting cases, as have been suggested above, are vertically integrated firm that dominant upstream and downstream, and who refuses to sell its upstream product to downstream competitors (used as an input) at price equal or higher than they sell the upstream product to other firms with whom they do not compete. That is exclusionary attempt to maintain monopoly power. You might want to call it “exploitive” in that the firm is “just” trying to make more profits from its downstream dominant position. But use of the term “exploitive” means that any time a firm engages in exclusionary conduct to maintain monopoly (ie even burning down a rival’s factory), it is exploitive.
The firm can say that any exclusionary conduct is non-naked because the increase in monopoly profits will spur more R&D and other investment to try to get a monopoly. This is the argument against excessive pricing cases. But note that the argument also can be used to say that all exclusionary conduct (even burning down factories or merger to monopoly) should be legal by object. Collusive conduct too, for that matter.
steve salop
7 October 2017 at 1:12 am
Actually, we had a funny case a few years back in Greece, where the dominant company’s employees were organized in “commando groups” and were destroying the property and selling materials of its main competitor (also taking photos of the destroyed property). There were also “night raids”. The HCC was fortunate to find all this, including the photos, but unfortunately it never published the photos of the commando groups in its final decision, which was upheld by the courts….
Makis Komninos
8 October 2017 at 9:10 pm
Interestingly, based on the facts you give there, this is a great example of the kind of conduct which would NOT have been prohibited under Australia’s misuse of market power law, at least as it stood until its major reform this August (yet to come into effect). According to our law, a dominant firm would not infringe the law if a non-dominant firm could engage in the same conduct since this would not be ‘taking advantage’ of market power.
In fact, the example repeatedly given by courts and commentators was that a dominant firm would NOT infringe the law if it burnt down its competitor’s factory because it would not need market power to engage in that conduct.
Katharine Kemp
10 October 2017 at 2:42 am
Katharine, then shouldn’t it be equally unlawful for non dominant competitors to do that? Note that if EU law was read literally, there would be a requirement to show a nexus between abuse and dominance (“abuse … of a dominant position”). Today, the law is read as “abuse … by a dominant” firm
Nicolas Petit
12 October 2017 at 2:18 pm
As a matter of logic, yes, if a non dominant firm can engage in the same unilateral conduct (with the same likely effect) as a dominant firm, that should be prohibited. But Australia, like most countries, has a ‘substantial market power’ threshold built into the law as a screen – on the assumption that firms with substantial market power are much more likely to create anticompetitive effects. Markovits has spent time challenging that assumption, but people still like market power thresholds.
I agree with you on the disconnect between the titles of these laws and their substance – when our new law comes into effect it will still be titled “misuse of market power” but it will require no use of market power and no connection between market power and substantial lessening of competition.
Katharine Kemp
12 October 2017 at 7:40 pm
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