Download PANEL II Criteria Used to Assess The Durability of Market

PANEL II
Criteria Used to Assess
The Durability of
Market Power
Durability of Dominance and
Identifying Entry Barriers and
Competitive Effects in Practice
Presented through a not-so-scenic
tour of Jersey, Channel Islands
ICN Unilateral Conduct Workshop,
Panel II, Washington DC
March 23, 2009
-Assume the presence of a dominant
firm making monopoly profits
Classic Economic Theory:
Entry restores effective
competition
Key Question:
Will it happen in
practice?
The Costs of Entry (I)
Establishment
Access to
Labor/Expertise
Facilities
•Capital Investments
•Sunk Costs?
Access to Capital
The Costs of Entry (II)
•
Potential bottlenecks
•
Supply Chain
•
Access to Markets
Legal Considerations
PATENTS (JERSEY)
LAW 1957
Potentially, Sector
Regulation
National Laws
PLANNING AND
BUILDING (JERSEY)
LAW 2002
CUSTOMS AND
EXCISE (JERSEY)
LAW 1999
Incumbents
•
Network Effects?
•
Legacy of State ownership?
•
Vertical Integration?
•
Reputation of incumbents?
Customers/Consumers
•
Barriers to Switching?
•
Search Costs?
•
Preferences?
Ultimately: Will New Competition
Restore a Competitive Market?
?
For the Potential New Entrant:
Is there a profitable business
case?
For the Competition Law Enforcement
Agency:
Entry timely, likely, sufficient?
Other market factors relevant?
Is dominance entrenched?
Panel II Speakers
• Dr. Simon Roberts
– Chief Economist and Manager, Policy and Research
Division, Competition Commission South Africa
• Jacques Steenbergen
– Director General, Belgian Competition Authority
• Ronald A. Stern
– Vice President & Senior Competition Counsel,
General Electric Company
• Charles Webb
– Executive Director, Jersey Competition Regulatory
Authority
Durability of dominance
Jacques Steenbergen
director general
ICN Unilateral conduct workshop – Panel II
Washington DC, March 23, 2009
Belgian Competition Authority
Directorate General
Durability of dominance: an ambiguous
issue
• Durability is a specific concern in case it increases
the risk of abuse:
– Exclusionary practices
– Exploitative abuses
– Discrimination
• Durability is also a specific concern when it is the
result and/or evidence of abusive practices that
aimed at the strengthening of a dominant position
• Durability of dominance makes abuses more serious
and exclusionary abuses are in turn likely to enhance
durability: it is an element of assessment/evidence
Belgian Competition Authority
Directorate General
Durability of dominance: an ambiguous
issue (2)
• But durability is as such not a constitutive element of
an infringement of the rules of competition, just as
dominance does as such not constitute an
infringement
• Because of an ambiguous attitude to dominance, we
inevitably also have an ambiguous attitude to its
durability
• And we can not exclude that durability mainly points
to consistent competitive success
• It must be assessed in the context of the assessment
of dominance and abuse
Belgian Competition Authority
Directorate General
Assessment of durability
• Assessment of dominance: see best practices
• Assessment of durability: mainly assessment of barriers
to entry (see presentation of Chuck Webb)
• Assessment of the causes of durability: only relevant to
the extent that:
– Durability is a specific concern
– The causes need to be addressed as such regardless of the
specificities of the unilateral conduct case: evaluation of the
regulatory environment and state action
Belgian Competition Authority
Directorate General
Durability of dominance and liberalization:
the case of incumbents
• The (former) monopolists can only lose market share:
are they (still) dominant?
• Sunk costs and written-of investments
• The technology timeline
• Price squeezes: caught between consumer welfare and
competitor protection?
• The unilateral conduct equivalent of sticky pricing?
(See further the presentation of Simon Roberts)
Belgian Competition Authority
Directorate General
ICN Unilateral Conduct Workshop
“Assessing Whether A Firm is Dominant – The Role of
Other Market Criteria”
Ronald A. Stern
Vice President & Senior Competition Counsel
General Electric Company
March 23, 2009
ICN Workshop
Other Market
Criteria
Engines for Large Regional Jets (70-90+ Passengers)
GE
Honeywel
l
Rolls
Royce
Pratt &
Whitney
1. Overall Installed Base
40-50%
40-50%
0-10%
0%
2. Installed Base of Aircraft in
Production
60-70%
30-40%
0%
0%
3. Order Backlog on Aircraft
Not Yet in Service
90-100%
0-10%
0%
0%
“Prior to the transaction, GE was already
dominant in this market.”
ICN Workshop
Other Market
Criteria
•
•
•
•
How Does the Relevant Market Operate?
Powerful Buyer – Aircraft manufacturer
Winner-take-all Bidding – 1 engine selected
Pricing “Locked-In” by contract for the life of
the aircraft program
Key Issue – Were there credible bidders when
the engine supplier was selected?
ICN Workshop
Other Market
Criteria
Key Large Regional Jet Engine Competitions
1
Engines Considered
Aircraft
GEE
PW
RR
SPW 2
CFM3
CF34-8C1*
NO
NO
NO
NO
Timing
CRJ700
1994
AI(R) 70/844
1996-1997
CF34-8
NO
RR BR 710
SPW14*
NO
728 JET4
1997-1998
CF34-8D*
NO
RR BR 710
SPW14/16
NO
ERJ170/190
1998-1999
CF348E/ 10E*
NO
RR BR 710
SPW14/16
NO
BRJ-X5
1999-2000
No
PW6000
RR BR 710
NO
CFM56-9
*Engine selected by aircraft manufacturer
Two-engine aircraft
PW/Snecma Joint Venture
3 GE/Snecma Joint Venture
4Program cancelled after engine selection (728 JET program was cancelled in 2002)
5 Program cancelled before engine selection
1
2
ICN Workshop
Other Market
Criteria
• Existence of Credible Bidders
• Multiple engine firms competed for large regional jet
opportunities – GE or CFM; RR; SPW or PW
• RR and PW each had a track record of success in
commercial aircraft engines generally and in adjacent
markets (small regional jets; 100-120 seat large
commercial aircraft)
• SPW JV won one of the large regional jet engine
competitions
Dominance/substantial market power
unlikely despite extremely large market share
ICN Workshop
Other Market
Criteria
• What Has Happened Since 2001?
• PW continued to invest in innovative geared fan
technology
• Snecma continued to pursue regional jet engine
opportunities separate from PW
• Three new large regional jet programs launched:
1. China Regional Jet (ARJ121) – GE engine
2. Russian Regional Jet (SSJ100) – Snecma/Saturn JV
engine
3. Mitsubishi Regional Jet (MRJ) – PW geared fan engine
ICN Workshop
Other Market
Criteria
• Growing Market Share Approaching 100% May
• Not Equal Dominance/Substantial Market
Power
• Examine how the relevant market works
• Assess “other factors” such as (1) powerful
buyers, (2) bidding/winner-take-all contracts, (3)
rivals’ success in adjacent markets, and (4)
ongoing innovation by rivals
• Focus on whether there is evidence of a high
decree of sustained pricing power – the RP’s
definition of Dominance/Substantial Market Power
Dominance, durability and ‘statecreated monopolies’
ICN Unilateral Conduct Workshop
Simon Roberts
23
Introduction
• Durability of dominance is important in dominance assessment,
and we are concerned with whether a firm’s dominant position
is entrenched, and why
• Dangers of over-enforcement and chilling effects? - matters
greatly how dominance was established
• A firm’s dominant position may be entrenched because of
previous/ongoing state support, even though firm’s inefficiency
and/or exercise of market power may mean there are some
fringe competitors
• Dominant firm may have the power, incentive to engage in anticompetitive conduct to undermine effective competitive rivalry
• In many countries this is a big issue for competition authorities,
compounded by relatively small markets, scale and scope
effects, access to upstream markets/vertical integration etc.
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What should we be considering in
‘state-created monopoly’?
• Ownership
• But state support is much wider:
– Subsidies, finance
– Rights to infrastructure, inputs etc
– Past regulatory provisions, licencing (such as marketing boards
and legal cartels, where there may have been regional
allocations)
• Not-regulated today (i.e. not talking here of regulated natural
monopolies)
and
• Where the advantage bestowed is not transitory
• Relates to other considerations such as entry barriers,
economies of scale/scope etc
25
Illustrative Examples
1. Grain Silos
• Owned by former cooperatives which had received high levels of state
support and subsidies, now private companies, providing wide-range
of services and also engaged in trading of grain
• Large investments required to build silos (although alternatives being
used: silo bags)
• High local transport costs for grain
• Silo firms had set conditions linking farmers’ storage of grain to their
own trading operations
2. Airlines (domestic flights)
• National carrier still state-owned with government capital injections,
after failed privatisation, facing rivalry in local market in ‘full service’
and ‘low cost’ airlines
• Inducements to travel agents relating to sales/quotes of its flights over
rivals
• Dominance? - Low cost and ‘full service’; time sensitive travel
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(corporate market)?
Examples cont.
3. Industrial chemicals – fertilizer manufacture
• Country’s major chemicals company; state-owned until 1990
• Continued to receive state support (incentives, infrastructure)
advantageous access to inputs (natural gas pipeline supply)
• Pricing main fertilizer chemicals against an imported
alternative fertilizer; alleged exclusionary actions against
downstream blenders/distributors/importers
4. Beer
• Incumbent brewer with c95% of market
• Not state-owned but historically very close links with state
• Entry barriers may appear low (scale economies etc), but
issues of branding, distribution etc
• Various alleged exclusionary/restrictive conditions on
distribution and retail outlets
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Implications?
• Avoid over enforcement / false positives – wrongly finding
abusive conduct
– this depends on the hurdle of dominance and on the criteria for
finding abuse
• Under enforcement is much more likely in countries with
small markets, given scale economies etc;
– higher levels of state support in the past and present further
reinforces this
– State support is one factor in ‘comprehensive consideration of
factors affecting competitive conditions in the market under
investigation‘
• Defining dominance is first step in effective enforcement
against anti-competitive conduct by firms with entrenched
dominance, especially state-created monopolies
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PANEL II
Criteria Used to Assess
The Durability of
Market Power
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