On 28 August 2023, the Turkish Competition Authority ("TCA") decided that EssilorLuxottica S.A. ("EssilorLuxottica") violated competition laws by bundling ophthalmic lens and ophthalmic machinery together which led to the exclusion of competitors in the market. On August 8, 2024, the TCA has published the reasoned decision1 ("Reasoned Decision"), providing greater clarity on its assessments. As previously analyzed in our team's article titled "Unbreakable Rules - Commitments: Turkish Competition Authority's EssilorLuxottica Decision" the TCA also concluded that EssilorLuxottica's that were deemed as abuse of its dominant position simultaneously breached the commitments it provided in the past in relation to conditional merger clearance decisions. In this article, we will first review the history of the Board's decisions that paved the way for the recent decision, and then examine the Board's analysis in determining the breach of commitments. On the other hand, it should be noted that the legality of the total fine exceeding the 10% penalty limit of the undertaking's turnover, due to the imposition of daily fines for breaches of commitments, is a separate discussion topic that is not within the scope of our article.
1. Essilor-Luxottica Decision2 and the First Set of Commitments
The origins of the Reasoned Decision trace back to 2018, when the TCA approved the merger between Essilor International S.A. ("Essilor") and Luxottica Group S.p.A. ("Luxottica"), both key players in the ophthalmic industry. Luxottica was predominantly involved in the wholesale and retail of optical frames and sunglasses, while Essilor was active in the production of ophthalmic lenses, machinery, and equipment. In its assessment of the merger, the TCA concluded that the relevant merger raised competitive concerns both due to the overlap between parties' activities in the market for the wholesale of branded sunglasses and due to the increased portfolio strength of the combined entity vis-à-vis the opticians.
At the time of the merger, Luxottica was the market leader in the wholesale market for branded sunglasses, while Essilor (through its subsidiary Merve Optik) was its closest competitor. The TCA identified concerns related to the horizontal overlap in this market, namely, that the merger would strengthen Luxottica's dominant position. Additionally, the TCA asserted possible conglomerate effects that could arise from the merger, given that Luxottica's dominance in sunglasses and frames, combined with Essilor's strong presence in the ophthalmic lens market, could lead to an abuse of market power through bundling or tying practices.
To address these concerns, the parties offered several commitments, which were accepted by the TCA. First, Essilor was required to divest its subsidiary, Merve Optik, to eliminate the horizontal overlap in the wholesale markets for branded sunglasses and prescription optical frames. This structural commitment was intended to maintain competition in these markets by ensuring that Merve Optik would replace Essilor as the second-largest player.
In addition to this structural commitment, the parties also proposed the following behavioral commitments for a period of three years following the merger:
- Prohibition on Tied Sales: The merged undertaking will not engage in tied sales of ophthalmic lenses, optical frames, and sunglasses, including by refusing to offer these products for sale separately to opticians in Turkey,
- Exclusivity Prohibition: Neither the parties nor the merged undertaking will impose contractual or de facto exclusivity clauses on opticians that would prohibit or restrict them from purchasing ophthalmic lenses, optical frames, and sunglasses from the parties' competitors.
2. EssilorLuxottica/Atasun Decision3 and the Second Set of Commitments
In 2019, EssilorLuxottica sought TCA approval to acquire shares in GrandVision, a retail chain that owned Atasun Optik in Turkey. The TCA's competitive concerns in this case were not related to a dominant retail position but focused instead on the potential vertical impact of the transaction. The TCA was concerned that EssilorLuxottica, due to its upstream market power in the wholesale of ophthalmic lenses, machinery, and frames, could favor Atasun Optik at the retail level, potentially distorting competition.
To address these concerns, EssilorLuxottica submitted a new set of commitments that broadened the scope of the previous obligations from the 2018 merger. The new commitments also extended the duration of the commitments beyond the original three-year period.
These new commitments largely mirrored the previous ones but included a few key distinctions. First, the new commitments applied to ophthalmic machinery in addition to lenses, frames, and sunglasses, thus broadening the scope. Second, the commitments reaffirmed the prohibition on tied sales, ensuring that all products would be offered separately. However, unlike the 2018 commitments, the new set did not contain an explicit prohibition on contractual or de facto exclusivity provisions related to opticians' purchases.
3. Breach of Commitments
In assessing whether EssilorLuxottica's conduct breached its commitments from the 2018 decision, the TCA first pointed out that there was no violation of the tying prohibition, as there was no evidence of tied sales of ophthalmic lenses, optical frames, or sunglasses. EssilorLuxottica offered these products separately to opticians, in compliance with the first condition of the 2018 commitments.
However, the TCA found that EssilorLuxottica had breached both the contractual and de facto exclusivity commitments imposed in the 2018 merger decision. According to the commitments, EssilorLuxottica was prohibited from imposing contractual provisions or practices that would effectively force opticians to buy exclusively from them.
First, in terms of contractual exclusivity, the TCA detected explicit exclusivity clauses in contracts signed with opticians, which violated the 2018 commitment. One such contract from 2018 contained a clause stating, "The customer undertakes to purchase exclusively from ALTRA all the glasses it needs during the contract period." This contractual provision directly contradicted EssilorLuxottica's commitment not to impose any exclusivity terms that would prevent opticians from purchasing from its competitors.
However, the more complex breach involved de facto exclusivity, which does not necessarily rely on explicit contractual language but on business practices that effectively force opticians to purchase primarily from EssilorLuxottica. The TCA found that, through its bundled sales practices, EssilorLuxottica created conditions that led to de facto exclusivity. EssilorLuxottica provided optical stores with highly favorable terms on ophthalmic lens-cutting machines, sometimes even offering them for free, in exchange for agreements to buy a considerable amount of ophthalmic lenses from EssilorLuxottica. This arrangement, while not always documented as a formal exclusivity clause, functionally restricted opticians from buying lenses from competitors due to the financial penalties and risk of losing the machines if purchase targets were not met.
The TCA argued that this bundling practice, combined with the reclaiming of machines if opticians did not meet their agreed purchase volumes, effectively locked opticians into purchasing primarily from EssilorLuxottica, making it very difficult for them to switch to competitors. It was also stated that the long-term nature of these contracts further reinforced this dynamic. Although the contracts did not explicitly require exclusivity, according to the TCA, the structure of the agreements led to the same result: opticians were incentivized, and often compelled, to purchase lenses exclusively from EssilorLuxottica.
Regarding the second set of commitments under the 2021 EssilorLuxottica/Atasun decision, the TCA found that there was no breach, as these commitments did not explicitly prohibit contractual or de facto exclusivity provisions related to the purchase of ophthalmic lenses, optical frames, or sunglasses. Therefore, the conclusion that EssilorLuxottica created de facto exclusivity in its business practices did not amount to a violation of the 2021 commitments.
4. Price-Cost Analysis and Competitive Impact of Exclusivity
In evaluating the contracts signed between EssilorLuxottica and opticians, the TCA examined whether the prices offered for ophthalmic lenses and lens-cutting machines were above or below cost. Specifically, the investigation focused on determining whether the overall costs of the bundled products were covered and if the pricing of either the lenses or machines fell below a level that would allow a competitor with similar efficiency to compete on equal footing.
The TCA applied the Avoidable Cost Test ("ACT"), which is commonly used in competition law cases to assess whether a firm's pricing is predatory or exclusionary. This test compares the price of a product to its Average Avoidable Cost ("AAC")—the cost that could be avoided if the undertaking stopped producing and selling that specific product. If the price falls below the AAC, it indicates that the undertaking is potentially engaging in below-cost pricing to exclude competitors.
Findings of the Price-Cost Analysis
- Ophthalmic Lenses: The TCA's analysis showed that, on average, the prices charged by EssilorLuxottica for ophthalmic lenses were above the AAC when considering contract-based pricing. When reviewing the top 50 contracts by lens purchase volume in 2021, the TCA found that the unit price of the lenses exceeded their AAC. This suggested that the lenses themselves were not being sold at a loss and that lens pricing, on its own, did not contribute to anti-competitive effects.
- Ophthalmic Machines: However, the analysis revealed that the ophthalmic lens-cutting machines were frequently sold below cost. The TCA found that in a significant portion of the contracts sampled (the exact percentage is redacted in the Reasoned Decision), the prices of the machines did not cover their costs. Specifically, the machines were offered at a loss in many cases, meaning that their selling price was lower than the AAC for these products. EssilorLuxottica subsidized these losses through higher profits on the ophthalmic lenses.
- Bundled Sales and Package Costs: Although EssilorLuxottica's pricing for ophthalmic lenses generally exceeded the AAC, the combined package of lenses and machines—when considered as a whole—sometimes fell below cost. The losses incurred on the sale of machines were offset by the higher profit margins on lenses. However, when assessing the entire bundle, the TCA found that in some contracts, particularly where machines were sold at significant discounts or even for free, the bundle did not cover the combined costs of production and sales.
The TCA determined that EssilorLuxottica's practices led to market foreclosure, particularly in the ophthalmic lens market. The investigation concluded that the undertaking's bundled pricing and below-cost sale of machines excluded competitors from both the lens and machinery markets, resulting in de facto exclusivity with its pricing strategies that distorted competition by leveraging its market power in ophthalmic machinery to force de facto exclusivity in the ophthalmic lens market.
5. Conclusion
In its decision, the TCA concluded that these practices breached both the contractual and de facto exclusivity commitments imposed on the undertaking in the 2018 merger decision. Although the contractual clauses clearly indicate a breach of the commitments, the issue of de facto exclusivity is more controversial. As explained above, First Set of Commitments do not extend to ophthalmic machinery, and the de facto exclusivity primarily arises from below-cost pricing in the ophthalmic machinery market. Although the outcome of the breach of commitments may not differ in this scenario, the TCA's assessments will hold significant importance in case law and are therefore worth examining.
The TCA took the position that although below-cost pricing was observed only in the ophthalmic machinery market and not in the ophthalmic lens market, the bundled sales of lenses and machinery created de facto exclusivity in the ophthalmic lens market. This conclusion reflects the TCA's assertion that leverage from one market can distort competition in another, even if anti-competitive pricing is not present in the market where the distortion occurs.
This broader interpretation may be problematic as it could result in restrictive case law where dominant firms are penalized for leveraging their market power across different, but related, markets, even when no below-cost pricing or direct exclusion occurs in the primary market under scrutiny. Such an approach would curb the pro-competitive practices of dominant firms utilizing their market power to expand or compete in less powerful markets. Dominant undertakings often engage in pricing strategies or bundling across markets to increase efficiency and benefit consumers, and overly restrictive interpretations of leverage could prevent legitimate competitive behaviour.
Footnotes
1. The Board Decision dated 17.08.2023 numbered 23-39/749-259.
2. The Board Decision dated 01.10.2018 numbered 18-36/585-286.
3. The Board's Decision numbered 21-30/395-199 and dated 10.06.2021.
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