ECONOMICS OF COMPETITION - PowerPoint Presentation

1. ECONOMICS OF COMPETITION POLICY (2.2)Facoltà di Economia – Università la Sapienza – RomaAnno accademico 2018/2019Claudia Desogusclaudia.desogus@agcm.itclaudia.desogus3@unibo.it

2. The assessment of whether an undertaking is in a dominant position and of the degree of market power it holds is a first step in the application of Article 82.According to the CJEU case-law, holding a dominant position confers a special responsibility on the undertaking concerned, the scope of which must be considered in the light of the specific circumstances of each case (Michelin I, Michelin II)Dominance: what for2

3. Dominance: a definition“The dominant position… relates to 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, its customers and ultimately of the consumers….” (United Brands, Hoffmann La Roche).Economic concept? NO. Political-legal notion of power intended as the ability of a firm to unilaterally impose its own market behavior on other firms and to condition their market behavior.Different from market power3

4. Dominance and market powerMarket power refers to the ability of an undertaking to raise prices above the competitive level.Market power is a matter of degree, whereas dominance seems to be an absolute concept.Wrong! A firm is dominant when it is able to «behave to an appreciable extent independently”: it is not necessary that the firm is totally independent from competitors, customers and consumers (Hoffmann La Roche).Dominance does not coincide necessarily with monopoly or quasi-monopoly. That is why it can be compatible with a certain degree of competition.4

5. Dominance: a definitionDominance thus indicates the ability:to «contain competition», not to ignore it.to plan a controlled reaction to competitors’ efforts without suffering from excessive profit losses, or to impose commercial strategies that lead to an advantage for the firm but not for the other firms who are not capable of contrast/replicate.Dominance is the ability of a firm to obtain benefits or put in place commercial practices that it could not have obtained/put in place if the market was characterised by an effective competition.From a legal point of view it identifies “commercial power”.5

6. Dominance: a definitionFrom an economic point of view, the corresponding market structure lays in between perfect competition (ideal max degree of inability to behave independently) and monopoly (ideal max degree of ability to behave independently).Possible structures: oligopoly, monopolistic competition or a situation where a firm has a position superior with respect to its competitors so that it can fix prices above the competitive level.The latter is the market structure closest to the legal notion of «dominance» -> It identifies the structural market powerAs opposed to non structural market power, i.e. an economic power that allows the firm to fix the price of its own product at supra-competitive levels but does not allow to fix prices/quantities for the entire marketmonopolistic competition – market with differentiated products where all firms enjoy a certain degree of independence, thanks to trademarks, asymmetry of information, specific investments).6

7. Conducts below dominance’s thresholdNon structural market power alone normally is not sufficient to generate anticompetitive effects.Firms are not in absolute superior, i.e. independent, from the others.Market should be able to self-correct (other differentiated products’ competitive constraints) so that antitrust intervention should not be neededHowever, capacity constraints and effective market access may impede markets’ self-correction.E.g. do switching costs allow consumers to turn to another competitor’s product or do they limit firms’ ability to freely choose another source of supply?7

8. Lack of real alternativesSunk investmentsEconomic dependenceLack of assortmentMust-stock productsThe stronger firm becomes an indispensable commercial partner for the weakest firmThe stronger firm can impose any price/economic or commercial condition/term on the weakest firmIts independence is not horizontal (towards the market) but vertical (towards the weakest firm)Conducts below dominance’s thresholdBargaining inferiority/weakness8

9. Dominance: a new definition?Dominance in a post-Chicagoan sense: non necessarily in a structuralist way but in a dynamic waythat is by profitably reducing the output without the competitors are able to respond to the output reduction with an increase of their output.This inability can be caused by capacity constraints or by lack of access to consumers (switching costs).Relative (vertical) market power might lead to horizontal foreclosure.In certain circumstances, also relative dominance firms might «contain competition».9

10. Dominance: assessmentIn general, the ascertainment of the existence of a dominant position derives from a combination of several factors which, taken separately, are not necessarily determinative.Not only a quantitative assessment (price/output) but also qualitative (ownership of an essential facility, IPRs, licences, input control etc.).10

11. Dominance: assessmentActual Competition: number of competitors, characteristics of competitors (market shares, brands, spare capacity, etc.)Potential Competition:entry barriers (economic, technological, administrative, legal, strategic (signalling, aggressive incumbency), etc.);profitability of the entry;timing.Countervailing PowerOther structural elements: brand, distribution channels, deep pocket, vertical integration, etc.11

12. Dominance: assessmentMarket shares provide a useful first indication about the market structure and the relative importance of the various undertakings active there (Hoffmann La Roche)Low market shares = good proxy for the absence of substantial market power.Dominance is not likely if the undertaking's market share is below 40% in the relevant market. However, there may be specific cases below that threshold where competitors are not in a position to constrain effectively the conduct of a dominant undertaking (British Airways).The higher the market share and the longer the period of time over which it is held, the more likely it is that it constitutes an important preliminary indication of the existence of a dominant position.12

13. Dominance: assessmentMarket shares > 50% are a serious indicators of dominance (Akzo)Iuris tantum (rebuttable) presumption of dominanceIt is up to the firm to show that, despite the high market share, it is not dominantMarket share < 50% could indicate dominance (NO SAFE HARBOR) but no presumption is allowed, rather a full fledge analysis is requiredExamples:Microsoft: 90% of the market for PCs operating software systemsUnited Brands: 40-45% of the banana market (lively competition but not real constraint)Virgin/British Airways: 39,7% of the UK market for the procurement of air travel agency services (larger market share, international renowned company, hub network, range of transport services13

14. Assessment cannot be based solely on the existing market situationThe potential impact of (the threat of) expansion by actual competitors or entry by potential competitors is also relevant.An undertaking can be deterred from increasing prices if expansion or entry is likely, timely and sufficient.The latter is influeced by factors such as the barriers to expansion or entry:Legal barriersStrategic and exclusionary barriersInformational barriersSunk CostsEconomies of scale and scopeNetwork effectsControl of essential facilitiesDominance: assessmentEntry Barriers14

15. Legal barriers: IPRsTrade off between competition and innovationSchumpeter: monopoly profits are needed to spur innovationArrow: competition better spurs innovationSomewhere in between..Dominance: assessmentEntry Barriers15

16. The mere ownership of an IPR cannot be (solely) used to base the finding of dominanceBut it can be a determinant factor (e.g. when the IPR is an essential input to access a related market – Magill, Oscar Bronner, IMS Health, Microsoft)Existence vs exercise of IPRs (Consten & Grundig)Antitrust enforcement initially limited to the unlawful exercise of IPRs (existence considered just to determine dominance) Evolution towards existenceAstraZeneca (abuse I)PfizerIPRs as barriers to entry16

17. E.g.: the pharma market - firms’ strategies to block generic entryRefusal to license patentsRegulatory gamingPatent filing patent clusters,patent thickets,divisional patentsPatent evergreening (or product hopping)Patent settlements (‘pay for delay’ agreements)IPRs as barriers to entry17