Introduction

Although the amendments to the Competition Law that introduced the concept of dominant position into the retail market were adopted in March 2008 and are due to enter into force on October 1 2008, the Competition Council did not issue guidelines on the application of the new legislation until the end of August 2008. The delay is particularly remarkable because the debate about the introduction and application of the concept of retail dominance to counteract buyer power has lasted at least two years. The debate involved the council, economists, a number of retailers and various retailers' trade associations and legal representatives, as well as certain politicians responsible for Latvia's economic policy. This resulted in an unusually large number of views and suggestions on the new legislation, yet the council clarified its application only one month before the measures are due to come into force.

The amendments introduce the concept of dominant position into the retail market. They define it in terms of the procurement power and supplier dependence that allow a retailer to impose unfair and unjustified terms and conditions or demand unfair and unjustified payments, and thereby to hinder, limit or distort competition in a particular market. The prohibition against the abuse of retail dominance is intended to prevent the imposition or application of unfair and unjustified conditions with respect to:

• the return of goods, except those of inferior quality or goods (including new, unfamiliar goods) that are delivered at the supplier's initiative;
• payment for the storage of goods at the retail location, except where such payments are justified by the cost of promoting new goods which are unfamiliar to consumers;
• payment for the conclusion of agreements, except in the case of a trial period with a new supplier;
• payment for delivery of goods to newly opened retail locations;
• unjustified settlement terms; and
• unjustified contractual or other penalties.

This list is exhaustive and cannot be supplemented by additional interpretations. The essence of the prohibition rests on the terms 'unfair' and 'unjustified' and on the understanding of concepts such as 'new or unknown goods', 'newly opened retail locations' and other general terms. The prohibition seems to be phrased with a specific aim in mind and the demands from retailers for guidance were entirely reasonable. The question remains as to whether the guidelines adequately explain the key points.

Background and Studies

The guidelines are drafted with reference to competition experience in the United Kingdom, as well as decisions by the European Commission in assessing procurement markets for retail goods (eg, the merger of Rewe/Meinl). Thus, neither the council nor the country's retailers can refer to a study assessing the situation in Latvia. The council's recently published information shows that it ordered a comprehensive review of competition in the retail market for non-specialized consumer goods in Spring 2008, when the amendments were adopted. In reviewing the background information to the guidelines, it is clear that the European Commission has applied the 'classic' assessment of dominance to the retail market. This invites the question of whether the problems in the retail sector, if any, could not be tackled by applying the concept of 'dominant position' as derived from Article 82 of the EC Treaty and transposing it into national legislation, instead of introducing new amendments.

Products and Markets

The guidelines state that in order to assess the dominance of a particular retailer, the council will determine the relevant goods or group of goods being procured (eg, consumer goods, non-edible goods or construction materials), as well as the retail environment where such goods are later sold (eg, supermarkets or specialist stores). The council has indicated that supermarkets and small shops are likely to be considered separate and non-interchangeable retail environments. It refers to commission practice in suggesting that the relevant product market should be narrowed to groups of goods (eg, the separate procurement markets for bread or dairy products). With respect to the potential geographical scale of markets, the council notes that a market may be national in scope, but may be smaller. This description of the methodology to be used in defining the relevant procurement market provides a relatively useful set of guidelines that, if applied sensibly, give a practical understanding of the relevant markets. Unfortunately, the same cannot be said of the guidelines on assessing the existence of dominant position.

Assessing Dominant Position

The guidelines fail definitively to indicate how retailers should carry out self-assessment. In general, there are two possibilities.

One option is to:

• divide the goods into categories;
• identify the geographical boundaries of the procurement market and the interchangeability of the retail outlets; and
• calculate procurement market shares on the basis of the retailer's share of the overall procurement market for the specific group of goods to be sold in the specific retail outlet.

However, such data is not available in practice. The alternative is to assess the retailer's importance to each supplier with which it has a procurement relationship, provided that the supplier is willing to release such data.

A third option exists, although it combines the above approaches and is not readily apparent from the guidelines. It involves:

• conducting a general overview of the suppliers in each category of goods;
• asking suppliers to state the proportion of the overall amount of supplied goods that is supplied to each of the retailers; and
• generalizing by stating that this data is valid for the market as a whole (as suggested in the first approach). 

This approach, adopted by the commission in Rewe/Meinl, appears to be the only way to estimate the relative presence of retailers in each market. The only question is who will carry out the surveys in practice, as suppliers are unlikely to be willing to disclose such data to their retailers. Although this approach requires some difficult data-collecting groundwork, from a theoretical perspective the council should be praised for recognizing that the bargaining power of individual suppliers should be addressed.

Reading between the lines, the guidelines can be interpreted to mean that dominant position in the retail market cannot be abused against a supplier which has sufficient market power or even dominance in the upstream market (eg, production of the relevant category of the goods). This gives retailers a starting point in the segmentation of suppliers and in determining the strategies to be employed against them. However, it is clear - and perhaps unfortunate - that the aim of the measures is to protect weaker and smaller suppliers that cannot develop efficiencies which would allow them to dictate their own terms of trade. Could the prohibition of unfair and unjustified practices not have been developed and drafted along similar lines to the prohibition of unfair competition, so as to apply to all commercial relationships, irrespective of the size and power of the parties involved? This issue arises when actions which are considered abuses of dominant position are nothing more than attempts to shape the terms and conditions of an agreement between a retailer and a supplier. If the state is in favour of such protectionism and direct intervention, it could simply have ignored the issue of whether certain retailers are dominant.

Unfair and Unjustified Terms and Conditions

Abuses of dominant position in retail markets primarily concern the terms and conditions of contracts between retailers and suppliers. The council has noted that the main test used to determine whether terms and conditions are unjustified and unfair will be whether they would be applied in circumstances of free competition. This presents a problem similar to that encountered in determining competitive price levels - the identification of a point of reference. In addition, the council has indicated that dominance in retail markets imposes 'special responsibility' on a retailer, a concept clearly borrowed from the classic interpretation of dominance. The council has stated that it will not try to establish whether the supplier agreed to the terms and conditions of a contract in determining whether such terms and conditions are fair and justified. Instead, each agreement will be assessed against the standard of contract conditions in competitive markets.

Other Issues

These are the most significant indications that can be drawn from the guidelines. The remaining guidance explains the council's view of each form of abuse. In general, the council adopts a relatively broad prohibition policy, allowing dominant retailers only narrow bounds within which to continue their existing practices.

For further information on this topic please contact Ieva Azanda at Liepa Skopina Borenius by telephone (+371 7 201 800) or by fax (+371 7 201 801) or by email ( This email address is being protected from spam bots, you need Javascript enabled to view it ).

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