Download Dominance and Significant Market Power under EC Competition Law

Dominance and Significant
Market Power under EC
Competition Law
Nicolas Petit
Institute for European Legal Studies
University of Liege
www.ieje.ac.be
http://professorgeradin.blogs.com
Introduction – Purpose of the
presentation
(i) Provide an overview of the basics of
« dominance » from the perspective of
EC competition law;
(ii) Clarify the substantive and evidentiary
tests applied for identifying dominance
in its various forms.
Introduction – Outline of the
presentation
I. General remarks on Dominance and
Significant Market Power (SMP)
II. Single-Firm Dominance
III. Collective Dominance
IV. Other forms of Dominance
V. Conclusive Remarks
I.
General Remarks
Dominance under EC competition law (1)
Dominance is a central concept under EC competition law:
• Article 82 EC: commercial conduct of dominant firms under
close scrutiny – any commercial practice can be held
abusive;
• ECMR 139/2004: structural transactions (merger, joint
ventures) that create or strenghten dominant positions can
be (i) forbidden or (ii) subject to stringent remedies;
Main areas of
enforcement
• Article 81: cooperations between companies that lead to the
attainment of a dominant position do not qualify for an
exemption pursuant to Article 81(3)-4;
• Article 87: A State aid that prevents the exit of a company
(rescue aid) can be allowed if absent the aid, a firm
remaining on the market would recuperate the former market
share and gain a situation of dominance on the market.
Punctual
enforcement
Why does dominance matter for
Elec.Comm Sector? (2)
1.
Principles applied under competition law for assessing dominance are
directly relevant for SMP assessment; The law as it stands - Article 14(2)
Framework Directive:
« An undertaking is deemed to have SMP if either individually or jointly with
others, it enjoys a position equivalent to dominance »
Furthermore, competition law now understands dominance as an equivalent
to SMP - Discussion Paper on 82 EC (2005):
«For dominance to exist it (the firm under inquiry) must have substantial market
power »;
2.
Dominant players in the Elec. Comm. sector remain subject to the
application of competition law (article 82, ECMR etc.) in addition to SSR;
3.
In the long run, when (and if) regulation is rolled back, only these principles
will apply.
Sources: Where to find the relevant
principles? (3)
•
Case-law of ECJ and CFI (seminal cases in United Brands, Hoffmann-La Roche,
Airtours vs. Commission, Compagnie Maritime Belge);
•
Decisional practice of the European Commission under:
 Article 82 EC (recent important cases include Microsoft, Deutsche Telekom, Wanadoo etc.);
 European Merger Control Regulation.
•
Soft law instruments adopted by the Commission:
 Guidelines on horizontal mergers; forthcoming guidelines on vertical and conglomerate
mergers;
 Discussion Paper on Article 82 EC and forthcoming guidelines.
•
Legal scholarship – recommended readings:
 Krattenmaker, Lande and Salop, « Monopoly Power and Market Power in Antitrust Law », 76
Geo. LJ 241, 249-55 (1987);
 GCLC Research Papers on Article 82 – Geradin, Hofer, Louis, Petit and Walker, « The
Concept of Dominance », available at http://gclc.coleurop.be
A few words of caution: differences between
dominance and SMP (4)
There are significant differences between identification of
dominance under competition law and identification of SMP
under SSR:
SSR
ECMR
Art. 82 EC
Appraisal
Method
Forward-looking
assessment +
on-going
monitoring
Forward-looking
assessment
Backwardlooking analysis
Legal
Consequences
Remedies
under Art.7
Prohibition or
remedies
No remedy –
additionnal proof
of abuse
Divergence
Risk of errors/mistakes
Dominance into context (5)
• Reform of Commission approach to Article 82 EC:
publication of a Discussion Paper (December 2005),
consultation process and possible Guidelines;
• Recent reform of ECMR (Reg.139/2004): less formalistic
– dominance is no longer the only treshold for regulatory
intervention. Commission may act as soon as it finds
«unilateral market power » that significantly impedes
competition absent a dominant position;
• Sector specific regulation: increasing NRA interest for
collective dominance theories in oligopoly settings (see
the 2005 notifications in UK and Ireland) / 2006 Review
of the regulatory framework.
II.
Single-Firm Dominance
Definitions – the case law (1)
• Single firm dominance was defined early by the ECJ in
United Brands and Hoffmann-La Roche as:
“a position of economic strength enjoyed by an undertaking
which enables it to prevent effective competition being
maintained on the relevant market by affording it the power to
behave to an appreciable extent independently of its
competitors, customers and ultimately of its consumers.”
• Serious uncertainties raised by the definition:
– The concepts of « economic strength » or « independence »
have no economic meaning;
– Ignores the fact that in mosts markets, no firm is truly
independent (downward slopping demand curve etc.).
– No indication of which degree of « economic strength » or
« independence » must be achieved: « appreciable extent »???
Definitions (2)
• For these reasons, most economists and competition lawyers have
focused on the part of the definition that concerns a firm’s ability to
engage in business activities that “prevent effective competition
from being maintained”;
• From an economic perspective, competition can be said to be
effective when no firm, either acting individually or in concert, is able
to exercise substantial market power;
• Competition authorities, regulators and scholars unanimously agree
on this point and have translated dominance as substantial market
power on several occasions:
– A good illustration is found in the electronic communications regulatory
framework (see article 14 of Framework Directive) where the concept of
significant market power is equated with dominance.
– The Discussion Paper on Article 82 EC clearly states: « For dominance
to exist, the undertaking(s) concerned must have substantial market
power (§23, emphasis added)»
Definitions (3) – What is substantial
market power?
•
A first form of substantial market power is the power over price , i.e. “the
ability to raise prices consistently and profitably above competitive levels”
Main concern in the context of merger control assessment: the consolidation
of firms may create dominant players that can easily exploit customers and
end-consumers through charging supracompetitive prices
•
A second form of substantial market power is the power to exclude, i.e. the
“ability for a firm to engage in anti-competitive conduct and exclude or deter
competitors from the market”
Main concern under Article 82 EC: dominant firms have a superior ability to
engage into exclusionary behaviour hampering the competitive structure
•
When testing SMP, sector specific legislation is concerned with both issues
SMP players may (i) exploit their customers through excessive prices as
well as (ii) exclude their competitors through, for instance, a margin
squeeze strategy (retail prices lower than wholesale prices): « power
over price » and « power to exclude »
Definitions (4) –
Evidence/Measurement problems
Power over price
 How can one measure whether a firm has the ability to price above the
competitive price level? Economists tell us that the competitive price level is
virtually always impossible to calculate (on both conceptual and data grounds);
 In addition, for SMP to exist, the firm must be able to substantially increase
prices above the competitive level for a significant period of time. But this does
not say much either;
 Too narrow: market power is not only the power to influence market prices but
also the power to influence output, innovation, the variety or quality of goods or
services, or any parameter of competition for a significant period in time (DP at
§24). But how do you measure this? Assessment of innovation pace or of the
quality of goods/services is likely to be highly subjective (which explain why
competition authorities focus on price);
Power to exclude
 How can one speculate on the successful ability of a firm to eliminate
competitors before the conduct has been implemented? Important risk of false
predictions.
Definition (5) – Implications for
assessment method
Thus, because SMP/dominance cannot be ‘scientifically’
measured, it is assessed on the basis of an inference, in
other words, a presumptive method;
To ensure optimal quality of inference/presumption (i.e. limit the
risks of errors), competition authorities recourse to a cluster of
evidence (faisceau d’indices).
•Note that in its discussion paper, the European Commission is currently promoting on a
new definition based on « output »;
•Rationale: If a firm is able to restrict significantly total output in the market by restricting
its own output, this indicates that other firms are unable to replace the supply taken
away by the allegedly dominant firm. This implies that there are both barriers to entry
and barriers to expansion, which suggests that a firm with a large market share may well
have substantial market power;
•But that test again is very speculative.
Method applied for identifying a
dominant position
• Old method:
 Case-by-case assessment;
 Strong reliance on market shares (highly indicative - Five *
factor);
 Long list of other parameters without clear indications as to their
hierarchy and respective weigth;
 Shortcoming: method which lacked analytical clarity;
• New analytical framework from Discussion Paper:
 Case-by-case assessment;
 Three tier method: Commission refers to (i) market shares; (ii)
barriers to entry and expansion and; (iii) countervailing buyer
power.
Market Shares (1)
• Market shares (i) of the firm under inquiry; (ii)
of the various competitors and (iii) their
respective balance/imbalance;
• Market shares assessed in volume
(homogeneous products) and/or value
(differentiated products);
• Market shares on the « merchant market »,
i.e. captive sales (those made to subsidiaries)
not included into analysis/computation.
Market Shares (2) – The case-law
 In Hoffmann-La Roche the ECJ held:
“[...] very large shares are in themselves, and save in
exceptional circumstances, evidence of the existence of a
dominant position”.
 In AKZO, the ECJ added:
“with regard to market shares the Court has held that very large
market shares are in themselves, and save in exceptional
circumstances, evidence of the existence of a dominant position
[...] That is the situation where there is a market share of
50%”.
Market Shares (3)
Main downside of the case-law standard:
Risk of excessive evidentiary reliance on market shares!
Economic theory warns that market shares can be a very
imperfect proxy for market power. It has to be conforted
with analysis of supplementary factors;
Illustration: a film producer may enjoy a 100% market share on
the summer blockbusters market, it it has released its movie in
early July. However, its market power is limited because
competing producers will most likely enter the market in the
short run (mid July) and drastically increase the level of
competition in the market (time dimension important).
Market Shares (4)
In practice, this problem is far from overrated:
In its Microsoft decision, the Commission repeats the mantra that very large market
shares in excess of 50% “are considered in themselves, and but for exceptional
circumstances, evidence of the existence of a dominant position”.
There is thus a risk that the Commission will not abide by the highest standard of
evidence in the way it treats the additional factors of dominance. Of course, the
Commission does not end its assessment with the finding of a very large market
share. But the impression is created in most cases that the rest of the analysis is
apparently confined to looking for exceptional circumstances that would
disprove the presumption obtained from the sole analysis of market shares, rather
than the thorough analysis of market conditions which would be required to
substantiate a finding of dominance.
In addition, the case-law standard increases the incentive for the competition
authorities to come up with very narrow (and sometimes imaginative…) market
definitions, to make sure that the market share crosses the 50% treshold…
Market Shares (5)
• De minimis rule: Low market shares (below 25-30% on
the basis of ECMR and Guidelines on 81 EC) eradicate
concern for SMP/Dominance;
• Asymmetry of market shares among firms is important:
A firm can be dominant with a 35% MS if the competitors
are numerous and very small;
• Past evolution of market shares is important:
Fluctuations/volatility of market shares may indeed
indicate that there is competition on the market. For this,
it has to be shown that the fluctuations result from rivalry
(in other words that they do not result from mergers: a
competitor may have increased its market share by
acquiring another firm).
Market Shares (6)
Market Share (%)
MS > 50%
50%>MS>30%
MS<25-30%
Evidentiary consequences
Presumption of dominance/SMP –
marginal analysis of other
(disqualifying) factors
Multi-factor analysis with burden of
proof inversely proportional to the
size of the MS
De minimis rule - market power is not
substantial/No dominance
Other factors
• Recent decisions and Discussion Paper
mark a shift from (i) checklist/discretionary
approach to (ii) clearer and more
analytically correct approach:
• In addition to market shares, evidence of
dominance/SMP requires:
– Existence of barriers to entry and expansion
– Absence of coutervailing buyer power
Barriers to entry and expansion –
definitions (1)
• Barrier to entry: A barrier to entry is something
that stops a firm outside a particular market to
impose a constraint on the exercise of market
power within the market through the threat of
entry;
• Barrier to expansion: A barrier to expansion is
something that stops a firm already in a market
from being able quickly and cheaply to increase
its output.
Absence of barriers to entry and
expansion – rationale (2)
• A dominant firm is able to price above competitive level
profitably, (i.e. without the prospect that it will loose
customers to other firms) only if there are factors that
make expansion or entry of rivals unprofitable;
• Absent these factors, any pricing strategy above the
competitive level will trigger expansion of rivals
production and entry of new firms, making the initial
price increase unprofitable.
• In other words, rival firms will respond to a price rise
imposed by another firm by undercutting the price rise
and selling more output than previously, thus
undermining the attempt by the original firm to raise
prices profitably.
Barriers to entry and expansion - factors (3)
1.
Legal barriers to entry:
•
Undertakings enjoying exclusive rights to provide a given product or service (i.e., statutory monopolies) will
by definition enjoy a dominant position (Commission Decision, DPAG, 2004. DPAG has been granted an
exclusive statutory licence to provide basic postal services and was thus found dominant on this market;
Commission Decision, Clearstream, 2004. Clearstream was the only operator authorized under German
law to keep securities into collective safe custody);
Firms that enjoy intellectual property rights (e.g. patents) which prevent other firms from producing a given
product or service, unless there are alternative technologies.
•
2.
Natural barriers to entry: spectrum scarcity
3.
Economic barriers to entry/expansion
•
Sunk costs: costs that must be incurred in order to compete on a given market, and that are not
recoverable upon exit, e.g. large advertising campaigns, setting up of an adequate commercial network
with training and HRs’ costs etc.
In United Brands (§122), the firm’s dominant position on the market for the production and sale of bananas
was conforted by the fact that: There was a high barrier to entry « made up inter alia of all the general
expenses incurred in penetrating the market such as the setting up of an adequate commercial network , the
mounting of very large-scale advertising campaigns , all those financial risks, the costs of which are
irrecoverable if the attempt fails »
•
Economies of scale: there are economies of scale where the average production cost falls with an increase
in the production scale. A potential entrant may be deterred or delayed for a substantial period of time from
entering the market due to the perceived difficulty of competing successfully against the incumbent who
has already attracted such scale/scope economies (e.g., due to the need to reach a minimum viable scale
of production relative to the size of the market for entry to be profitable). See United Brands or BPB
Industries.
Barriers to entry and expansion - factors (4)
•
Capacity constraints: if there are substantial capacity constraints, or if the costs of utilizing
the capacities is high, rival firms may not be able to expand output in order to jeopardize a
price rise by the dominant firm. In BT/MCI(II), the parties dominant position on the markets
for international voice telephony services on the UK-US route was supported by the limited
capacity of international transmission capacities, coupled with the parties entitlements on
existing transatlantic submarine cables between the UK and the US.
•
Network effects: network effects occur where users’ valuations of the network increase as
more users join the network. The fact that well-established players have reached the critical
mass that is required for customers to perceive the network as a necessary asset may
discourage entry.
•
Indirect network effects: In Microsoft (at §§452 and following) the Commission established
Microsoft dominance in the « supply of operating systems that run on PCs » because:
« The quasi-totality of commercial applications written for client PCs are therefore
written to Windows as a platform. Plays as a barrier to entry for any competitor willing
to launch an operating system »
Thus it would have been extremely difficult, time-consuming, risky and expensive to
develop an alternative client PC operating system, with a priori no application able to run on
it, because users are very unlikely to buy an operating system without a wide range of
applications.
•
Absolute cost advantage: such as for instance, preferential access to essential facilities (i.e.
control of an infrastructure that cannot be replicated) to natural resources, or to capital
markets.
Barriers to entry and expansion - factors (5)
In the Deutsche Telekom decision (2002), the Commission considered that
DT’s detention of local networks/loop and the cost of replicating them constituted
a huge barrier to entry:
« Given the size of the investment required, the cost to a competitor of building a
network reaching as large a proportion of the population as DT's existing local
networks is a barrier to entry. The building of a comparable infrastructure is
uneconomic using existing technologies, and to extend one over the whole country
will remain difficult for the foreseeable future ».
In the Wanadoo Interactive decision (2003), the Commission placed emphasis
on the fact that Wanadoo, as a subsidiary of France Telecom active on the ADSL
residential mass market, had benefited from:
(i)
A number of technical advantages (preferential access to sensitive
technical information);
(ii) The commercial backing of France Télécom, whose network of
agencies gave it a comprehensive physical presence throughout the
national territory;
(iii) Logistical and financial support from France Télécom (favourable
payment terms and delayed invoicing for the services provided by FT to
Wanadoo interactive).
Barriers to entry and expansion - factors (6)
•
Financial resources: ambiguous role. In Hoffmann-La Roche, the ECJ held
that the fact that Hoffmann-La Roche had the largest turnover, had no
bearing on the finding of dominance. However, other cases do afford
importance to the overall size and weight of a company (Michelin I and
BPB Industries). Discussion paper holds that they are important only in very
specific circumstances. May allow the building of a strategic barrier to
expansion through retaliation threats;
•
Established position of the incumbent firms: it may be difficult to enter a
market where experience or reputation is needed to compete. Consumer
loyalty, importance of advertising, etc. are relevant factors in that respect;
•
Switching costs: when it is costly for customers to switch to a new supplier,
even tough the latter would price more agressively. Customers may be
locked in by fidelity formulas (miles in air transport for instance) or long term
contracts with expensive resiliation terms; non portability of cellular phone
numbers has for long generated substantial switching costs for customers;
•
Strategic behaviour: indications that the firm under inquiry has in the past
systematically deterred entry through predatory behaviour is relevant;
•
Others: portfolio/range of products (may make entry more costly). A firm
willing to expand output should do so on the whole range of products, etc.
Barriers to entry and expansion –
Note (7)
Under SSR, among the criterions for the selection of
markets that can be subject to regulation is the
« existence of high and non-transitory barriers to
entry ».
Thus, there is a high probability that if a market was
selected by the Commission in its recommendation,
a SMP/dominant operator should accordingly be
found by the NRA on this market.
Absence of Countervailing Buyer
Power (1)
• The ability of a firm to charge supracompetitive prices
depends also on the degree of concentration of the
buyers;
• Rationale: a powerful buyer can use its bargaining power
to stimulate competition among sellers by threatening (i)
to switch orders from one seller to the other; (ii) to
finance/sponsor entry of new operators or (iii) enter the
upstream market itself.
• For the first threat to be credible, the buyer must hold a
substantial share of the downstream market, so that it is
an unavoidable trading partner and the degree of
demand concentration must be high.
Absence of Countervailing Buyer Power (2)
Indeed, absent sufficient concentration downstream, the upstream dominant
supplier will price discriminate, offering reasonable prices/terms to important
buyers, and charging the monopoly price to smaller buyers;
Note that small buyers may nonetheless increase their buyer power by
grouping orders, organising joint bids etc.
Dominant Supplier
Competitive Pricing
Large Buyers: 55%
Monopoly Pricing
Small Buyers: 45%
What is not necessary/relevant for a
finding of Dominance/SMP
• Achievement of substantial profits: many dominant firms
are not making profits – losses do not prevent a finding of
dominance (ex: a dominant firm in a sector hurt by
structural crisis will make losses);
• Total elimination of all competition is not required (United
Brands at §113): the fact that a dominant firm does not
face significant competitive pressure does not mean it
faces no competition at all;
• The origin of the dominant position is not taken into
account:
 Dominance may have been achieved through superior business
acumen, efficiency etc.;
 The fact that dominance is the result of past public investments
over which the firm has not had any control is not relevant etc.
Detrimental to productive and dynamic efficiency, investments, etc.
Levels of dominance - SMP
•
Economic theory does not rule out drawing distinctions between
levels/degrees of dominance:
 A dominant firm may be able to price well above the competitive level for a long
time;
 Another dominant player firm may only be able to price just above for a short
period of time.
•
Under EC law: a firm enjoying a quasi monopoly could thus be found in a
position of “super-dominance”. In Microsoft, the Commission held:
“Microsoft, with its market shares of over 90%, occupies almost the whole
market. It therefore approaches a position of complete monopoly, and can be
said to hold an overwhelmingly dominant position”
•
ECJ has not recognized this concept yet. In relation to Article 82 EC, the
question is whether the standard of proof of abusive behaviour should be
relaxed when the firm is super dominant. Under SSR, a finding of
superdominance could lead to the application of more stringent remedies.
Single firm dominance in the
Elec.Comm. sector
•
Veto decision in case FIN/2004/0082 concerning the mobile access market
(Finland): Ficora concluded that one operator had SMP mainly on the basis
of high market shares (>60%). However, according to competition law
practice, market shares alone are not necessarily sufficient to establish
dominance and Ficora failed to consider sufficiently market developments
that would have rebutted the presumption of dominance;
•
Veto decision in case DE/2005/0144 concerning wholesale call termination
on fixed networks (Germany): The Commission challenged the German
regulator’s findings that only the incumbent operator, Deutsche Telekom,
was found to be dominant on its individual network in this market. The NRA
did not consider any of the other operators in respect of their individual
networks to be dominant, despite each having a market share of 100%. The
German regulator felt that any power on the part of these alternative
operators was curtailed by the purchasing power of Deutsche
Telekom. On the basis of legal and economic considerations (possibility to
legally compel DT to interconnect; fact that DT customers and in turn DT
would suffer from this; fact that DT has purchased interconnection even at
prices which it considered unreasonable), the Commission considered that
Deutsche Telekom could not exercise such countervailing power.
III. Collective Dominance
Collective Dominance –
Introduction (1)
• Scope: oligopolistic markets i.e. markets with a few sellers (e.g.
mobile telephony, tire manufacturers, oil distribution markets,
handset manufacturers, soda, etc.);
• Concern: tacit collusion, i.e. oligopolists collectively pricing
above the competitive level absent any formal cartel
agreement;
• Rationale: In certain oligopolistic market, the initiation of a price
cut by one operator is immediatly matched by the others. Thus,
as a result of this interaction, prices fall but the respective
market shares of the competitors remain the same. Each
oligopolists thus individually comes to the conclusion that it is
useless to cut prices.
Oligopolistic price competition is no
driver for profit maximization: Price fall
and the market share of each firm
remains stable
F1-33%
F2-33%
F3-33%
Initial Price Level
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
-10%
PL2
PL3
PL4
F1-33%
F2-33%
F3-33%
After four interactions on the market, the price has dropped by 30% and the
firms’ MS have remained stable – price competition is a loss-making strategy
Collective Dominance – Introduction (2)
Rather, in order to maximize profits oligopolists may find it preferable to increase their prices in a
coordinated fashion. And they may be able to do that without formally concluding a cartel agreement,
provided a few conditions are met:
 The oligopolists have common incentives (similar costs of production etc.);
 Each of the oligopolist can monitor the market to make sure that its competitors are acting in a
similar fashion, i.e. that they follow the price increase;
 If the monitoring reveals (detection) that one of the firms is trying to undercut the price of the others
(deviation), the latter must punish the deviation through the initiation of a price war (credible
retaliation). This in turn deters oligopolists from deviating.
Prices thus rise as if a cartel agreement had been entered into: Economists speak of « tacit collusion »
Difficult issue: how do the firms, absent any contact or agreement, individually manage to come to a
same view as to the level of the price/price increase?
Price leadership: one firm takes the lead, sets the price which the other oligopolist take as the benchmark;
Focal points: the price of the supplies/raw material, for instance, and its evolution, serve as a benchmark for deciding
on a price increase and its proportion;
Common features: the oligopolists are so symmetric (in terms of cost structure etc.) that they spontaneously
converge to a similar price level;
Facilitating practices or « plus » factors: exchange of information agreements, structural links through joint ventures,
interlocking directorates etc.
Collective Dominance – Introduction (3)
• Recommended reading: Patrick Rey, « Collective
Dominance in the Telecommunications Industry »,
mimeo, added to folder;
• Enforcement intensity: Little enforcement in comparison
to single firm dominance – but the transition of formerly
monopolistic markets to oligopolistic markets may
increase the amount of joint dominance cases.
Collective Dominance – the law as
applied
•
No pure article 82 EC joint dominance case in oligopoly setting: Compagnie
Maritime Belge, SIV, Almelo, Irish Sugar involved issues different from tacit
coordination;
Explanation
•
Commission is reluctant to use 82 EC to control price levels,
finds it inopportune to sanction rational behaviour, faces an
« identification problem », etc.
Commission prefers ex ante action: many cases under the EC Merger
regulation (e.g. where mergers leading to a reduction from 3 to 2 operators
been forbidden – e.g. Nestlé/Perrier,Gencor/Lonhro) – issue raised in at
least 85 cases;
Explanation
Commission seeks to prevent price rises rather than punish
•
Conditions for collective dominance have been set out in Airtours v.
Commission and in the Guidelines on horizontal mergers;
•
The analysis followed under ECMR is in principle applicable under Article 82
EC: See CFI (2005), Laurent Piau v. Commission. Confirmed by discussion
paper, §§47-48.
The Various forms of Collective
Dominance
Coordination can affect many parameters:
• Outright parallelism on price;
• Coordination on output;
• Coordination on capacity utilization;
• Coordination on quality;
• Coordination on innovation;
• Market sharing;
• Allocation of contracts in bidding markets etc.
Analytical Framework for Identifying a
Collective Dominant Position (I)
Following the adoption of the guidelines on horizontal
mergers, four cumulative conditions have to be met:
1. It is relatively simple to reach a common understanding on the
terms of coordination (common view of collusion terms);
2. The firms must be able to monitor to a sufficient degree whether
the terms of coordination are being adhered to (transparency);
3. In order to stabilize the coordination over time, there is some
form of credible deterrent mechanism that can be activated if
deviation is detected (retaliation, e.g. price war);
4. Competitive constraints (current and potential competitors, as
well as customers) do not jeopardise the results expected from
the coordination.
Analytical Framework for Identifying a
Collective Dominant Position (II)
To assess whether each of this condition is met, need to factor in a
number of parameters/market characteristics defined both under
sector specific legislation and general competition law:
Factors listed in Annex II
Framework Directive
•Maturity of markets,
•Stagnant or moderate growth on the demand side,
•Low elasticity of demand,
•Homogeneous product,
•Similar cost structures, similar market shares,
•Lack of technical innovation, mature technology,
•Absence of excess capacity,
•High barriers to entry,
•Lack of countervailing buying power,
•Lack of potential competition,
•Various kinds of informal or other links between the
undertakings concerned,
•Retaliatory mechanisms,
•Lack or reduced scope for price competition.
Other Factors taken from
Commission Practice
•Symmetry of market shares and cost structures;
•Number of market players (almost per se policy
against duopolies);
•Frequency and size of economic transactions (the
less frequent and the largest, the biggest the
incentive to deviate)
•Stability of market shares (aligns oligopolists
interests)
•Multimarket contacts (increase the scope for
retaliation)
•Fluctuating demand (makes monitoring difficult)
•Overcapacity (increase incentive to deviate but also
increase seriousness of retaliation)
First Condition – Common
Understanding
Important factors are, inter alia:
– Small number of firms: easier to reach a common
understanding;
– Homogeneous product: easier to coordinate the price
for a single, homogeneous product, than on hundreds
of products which are all differentiated;
– Stable demand: easier to coordinate on a price when
demand and supply conditions are relatively stable
than when they are continuously changing;
– Facilitating practices: exchange of information
through cross shareholdings, interlocking directorates
etc.
Second Condition – Monitoring
Deviations (transparency)
Important factors are, inter alia:
– Small number of firms;
– Characteristics of economic transactions
(sealed bids vs. public auctions);
– Publication of price lists;
– Importance of advertisement;
– Simplicity of products, tariffs etc.
– Institution disclosing publicly price
information (regulator?) etc.
Third Condition –
Deterrence/retaliation Mechanisms
• Important factors are, inter alia:
– Frequency of economic transactions: if transactions
are irregular, punishment may occur too late;
– Multimarket contacts: the multiplication of the points
of interactions between firms (presence on several
markets) increases the scope for retaliation;
– Substantial overcapacities;
– Deep pockets: important financial resources and easy
access to capital markets often necessary to support
a price war.
Fourth Condition – Ineffectiveness
of competitors’ and buyers’
reactions
Important elements are, inter alia:
• Barriers to entry, expansion;
• Unconcentrated demand side;
• No maverick operator (i.e. a firm that may have less
to gain from coordination or be less threatened by
punishments from rivals because of the kinds of
products it sells or because of its cost structure);
• Buying practices: a buyer concentrating a large
amount of its requirements with one supplier or by
offering long-term contracts may give incentives to
deviation.
Collective Dominance – Final
Remarks
Increasing interest for the concept under SSR:
– OFCOM on Broadcasting Transmission Services in the UK
Ofcom argues that ntl and Crown Castle (terrestrial network
operators) are a collusive duopoly. Commission finds no
transparency on pricing and no retaliation mechanism. NRA
eventually withdraws notification.
– COMREG on wholesale mobile access and call origination:
Commission accepts a finding of collective dominance between
Vodafone and O2.
As far as general competition law is concerned, suspicions of
collective dominance may indicate that the firms have engaged
into explicit collusive behaviour, which is sanctioned under article
81 EC (see e.g. the mobile operators pacification strategies on
the French market – Conseil de la Concurrence 2005).
IV. Other forms of dominance
(infra)-Dominance?
• Hypothesis: On a given market, several firms can each enjoy
individually a substantial degree of market power absent a
formal dominant position (MS below tresholds): It can be so
because of product differentiation, switching costs, consumer
fidelity etc. See Posner, Antitrust Law at p.265;
• Illustrations:
 In the market for sport shoes, Nike can increase its prices to a
certain extent, without the fear of loosing a substantial number of
customers to Reebok, and vice-versa;
 In the market for German cars, BMW can profitably increase its
prices to a certain extent, without the fear of loosing customers to
Mercedes, and vice-versa.
• Theoritical and legal support: literature on monopolistic
competition (Chamberlin) as well as the new form of « unilateral
effects » (below dominance) analysis under ECMR
Implications for Electronic
Communications
•
Different from collective dominance both economically (as producers increase prices but not
necessarily at the same level) and legally (individual exercise of market power);
•
As long as SMP is equated to dominance, this form of market power is not formally encompassed
by SSR;
•
But, in its guidelines on the assessment of SMP, a finding of SMP entails a lack of effective
competition (e.g. recital 5 of Communication « markets are considered not to be effectively
competitive »). And, recital 25 of the ECMR considers that these effects are covered under the
concept of ‘significant impediment to effective competition’:
SMP
=?
ECMR
« Below Dominance » Unilateral Effects
No Effective Competition
•
Larouche et De Visser allude to this question at note 7 in their TILEC Discussion Paper,
November 2005;
•
So, the argument that SMP does not encompass infra-dominance is, to a certain extent,
semantics...
Relevance for electronic
communications?
• Difficult to see but could be relevant in markets
with differentiated products: potential for product
differentiation is high with sector that is
increasingly content-driven;
• Mobile retail market - each mobile operator
proposing a specific subscription/formula?
– Operator 1 offers subscription+free handsets;
– Operator 2 offers subscription+free TV content;
– Operator 3 offers subscription+free phone time.
« Leveraged » dominance
In Tetra Pak II, the Court of Justice held that a firm with:
(i) A quasi-monopoly on market A;
(ii) A leading – but not dominant – position on market B;
(iii) Close links between A and B (similar customers)
Could be found dominant on the overall AB market,
absent a formal demonstration that it was dominant on
B (in fact Tetra Pak did not dominate market B).
TP « holds a dominant position on the
markets in question as a whole » (AB).
Market A – Dominated by
TP – MS>78%
Market B – Not dominated
by TP – oligopoly
TP
TP
Links A-B
22%
Rivals’ customers
43%
35% of TP’s customers
10-15%
bought in A and B
TP’s customers
>50%
Rivals’ customers
Comments
• At the time of the ruling: still controversial whether there
could be an abuse on a market different from the one
where the dominant position is found. ECJ says only
under « exceptionnal circumstances »;
• Convenient on evidentiary grounds. The identification of
(i) a dominant position on a market, and (ii) of links with
neighbouring markets, allows:
 The extension of dominance finding to the latter without going
into further analysis;
 The imposition of additional/wider remedies;
• Line of reasoning which can be transposed to verticallyrelated market: useful in network industries.
V. Conclusive remarks