Turkey: The Competition Board Concluded Its Preliminary Investigation Concerning Excessive Pricing Allegations

The Turkish Competition Board (the "Board") published its reasoned decision 1 on the preliminary investigation regarding the allegations that Viessmann Isı Teknikleri Ticaret A.Ş. ("Viessmann Isı") had violated Article 6 of the Law on the Protection of Competition ("Law No. 4054") by abusing its dominant position in the spare-parts market for Viessmann-branded combi boilers through excessive pricing.

Viessmann Isı is the exclusive distributor of Viessmann-branded products within Turkey, and is solely owned and controlled by Viessmann Holding International GmbH. Viessmann Isı distributes Viessmann-branded heating and cooling products, and also provides after-sales services. In defining the relevant product market, the Board first examined the heating-cooling sector and then focused on combi boilers and their spare parts, as the allegations revolved around the excessive pricing of the spare parts for Viessmann-branded combi boilers. The Board found that Viessmann-branded combi boilers were differentiated substantially from other brands in terms of their technological properties, the quality of their components and materials, and the testing and quality-control mechanisms that were employed during the R&D process. Consequently, the Board found that the substitutability of Viessmann-branded combi boilers was substantially limited. In line with these findings, the Board defined (i) the relevant product market as "the spare-parts market for Viessmann-branded combi boilers," and (ii) the relevant geographic market as "Turkey."

In its assessment, the Board first examined whether Viessmann Isı was in a dominant position in the relevant product market. Considering that (i) spare parts for Viessmann-branded combi boilers were not substitutable (except for some of its parts), and that (ii) Viessmann Isı was the sole and exclusive distributor of Viessmann-branded products, the Board determined that Viessmann Isı held a dominant position in the relevant product market, and then proceeded to analyze whether it had abused its dominant position by way of excessive pricing.

Before delving into the merits of the case, the Board initially reiterated its position with regards to excessive pricing. The Board first defined "excessive price" as "the price determined consistently and significantly above the competitive level as a result of the undertaking's market power." The Board then examined the US antitrust practice and the EU competition law approach regarding excessive pricing, and found that there was a consensus among those competition authorities in favor of not intervening in cases where the market is expected to correct itself in the short or medium term.

In line with the foregoing analysis, the Board acknowledged that intervention with respect to excessive pricing could lead to certain downsides and negative effects, such as deterring new entries into the relevant market, decreasing the motivation and incentives for investment and innovation, and leading to a risk of legal error by competition authorities in terms of calculating what should be inferred as an "excessive price." Accordingly, the Board emphasized that, in order to deduce abuse of dominant position through excessive pricing, certain market conditions, such as (i) market shares and concentration levels within the market, (ii) barriers to entry and expansion (including legal barriers, capacity restrictions, economies of scope and scale, absolute cost advantages, exclusive access to key inputs, well developed distribution and sales networks, incumbent firm's position and network effect, and strategic barriers such as long-term strategic effects), and (iii) buyer power, should also be taken into account.

Therefore, the Board concluded that determining a price that (i) would not be charged in a competitive market, and (ii) would be well above the economic value of the product/service offered, would be considered as excessive pricing in terms of competition law.

Subsequently, the Board conducted a two-step economic value test including the following: (i) a comparison between the actual prices and actual costs of the products, and (ii) a comparison among the prices of competing products. The Board stated that the objective in comparing the actual prices and costs was to estimate the profitability of the relevant undertaking. In order to determine the "reasonable" profit margin, the Board referred to its past practice,2 where it had evaluated profit margins in terms of excessive pricing. The Board observed that, although it takes the notion of economic value and the price comparisons into consideration in its assessment of excessive pricing, its decision ultimately hinged more on the second prong of the test (i.e., comparing the prices of competing products) than the first prong of the test (i.e., a comparison of the actual prices and actual costs of the products).

Accordingly, the Board applied the two-step economic test for Viessmann Isı by comparing the profit margins of the bestselling spare parts for Viessmann-branded combi boilers from 2014 to 2017. The Board noted that the profitability of the spare parts (particularly gas valves) had increased in 2017 relative to the previous year. However, the Board then stated that the increase in profitability would have been substantially lower if other fixed and variable costs of the undertaking had been taken into consideration. Moreover, bearing in mind that the domestic producer price index had increased 28% between 2014 and 2017, the Board determined that the profitability of spare parts for Viessmann-branded products (except for gas valves) was reasonable. With that said, the Board asserted that, since the sales of gas valves were only a small part of the overall sales of the company, Viessmann Isı was not likely to achieve monopolistic profits through the sale of gas valves.

In the second prong of the test, the Board compared the prices of Viessmann-branded spare parts with the prices of competing products from other companies. The Board found that Viessmann had sold most of its spare parts (except for gas valves and water flow switches) for lower prices than those offered by Vaillant (its competitor in the same market segment), whereas its prices were higher than those offered by Bosh/Buderus (its competitor in the lower market segment). Furthermore, the Board declared that the primary market (i.e., the combi boilers market) should also be taken into account while evaluating the allegations with respect to excessive pricing in the spare parts market. In light of this approach, the Board concluded that excessive pricing of secondary products (i.e., spare parts) would not be economically rational in cases where the primary market (i.e., the combi boilers market) was a competitive market, given that consumers can easily switch to other combi boiler brands in case of an increase in the price of spare parts for combi boilers.

In light of the foregoing, the Board ultimately concluded that there was no legal grounds to initiate a full-fledged investigation with regard to the allegation that Viessmann Isı had abused its dominant position by way of excessive/exploitative pricing, since (i) consumers had plenty of alternatives to Viessmann in the combi boilers market, (ii) the combi boilers market was a competitive market, hence excessive pricing of combi boiler spare parts would not be profitable or sustainable in the medium or long term, (iii) the profitability ratio of Viessmann Isı did not indicate that it engaged in excessive pricing, and (iv) the prices of spare parts for Viessmann-branded combi boilers were lower than its competitors' prices in the same segment, and, for certain products, lower than its competitors' prices in the lower segment.

This decision can be viewed as a reaffirmation of the Board's well-established decisional practice on excessive pricing, given that the reasoning and the methodology that the Board used in reaching and constructing its decision were in line with the Board's decisions in previous cases.

Footnotes

1 The Board's Viessmann Isı decision, dated 15.05.2017 and numbered 17-16/223-93.

2 See The Board's Belko decision, dated 06.04. 2001 and numbered 01-17/150-39; MTS decision, dated 26.05.2006 and numbered 06-36/462-124; Biletix decision, dated 01.03.2007 and numbered 07-18/164-54; Tüpraş decision, dated 17.01.2014 and numbered 14-03/60-24, and Congresium decision, dated 27.10.2016 and numbered 16-35/604-269.


This article was first published in Legal Insights Quarterly by ELIG, Attorneys-at-Law in December 2017. A link to the full Legal Insight Quarterly may be found here.


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