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Abuse of Dominance
Alice Pham28 October 2014
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1. Introduction2. Definition of relevant markets3. Analysis of market power4. Abusive practices5. Efficiency defenses
1. Introduction
What is ‘abuse of dominance’/’abuse of dominant position’?• “Abuse” of a dominant position occurs where the dominant
enterprise, either individually or together with other undertakings, exploits its dominant position in the relevant market or excludes competitors and harms the competition process. (ASEAN Regional Guidelines, §3.3.1.2)
• “Abuse of a dominant position occurs when a dominant firm in a market, or a dominant group of firms, engages in conduct that is intended to eliminate or discipline a competitor or to deter future entry by new competitors, with the result that competition is prevented or lessened substantially” (Competition Bureau, Canada, www.competitionbureau.gc.ca)
1. Introduction
What do we look at when assessing a possible abuse of dominance?
- What is the market of goods/services we are looking at? Defining the relevant market!
- What is the market position of the firm in focus? Assessing the market power!
- What is the business practice in focus? Assessing the abuse!
- Does the business practice harm competition? Assessing the effects on competition!
1. Introduction
Dominant position in a marketDefinition of the relevant market?Is there a dominant position in the relevant market?
Business practice by the dominant firmExploitative abuse?Exclusionary abuse?
What are the effects of this business practice on competition?Is the business practice preventing or lessening competition
substantially?
2. Definition of relevant markets
1. Purpose of market definition2. Main concepts3. Product and geographic market definition– Key concept: Demand substitution, Supply substitution
(topic for tomorrow)– A framework of analysis: SSNIP-Test, price correlations
and other indicators (topic for tomorrow)– Market shares
4. Relevant markets in the Draft Competition Law of Myanmar
2. Definition of relevant markets
1. Purpose of market definition– Framework for competition analysis– Calculation of market shares– Preliminary step to assess market power/a dominant
position
Caution:Market definition is time consumingResults need to make economic sense while
comprehensible to a non-expert
2. Definition of relevant markets
2. Main concepts: Identification of the products /services which are the
closest substitutes for the product / service in question Internationally accepted approach: SSNIP-Test (Small
but Significant and Non-transitory Increase in Price) Close substitutes in the eyes of buyers (demand
substitutability) Close substitutes for suppliers who could produce
goods or services in question (supply substitutability) Boundaries of the market not always obvious
2. Definition of relevant markets3. Product and geographic market definition• “Relevant market” refers to the product range and the geographic area
where competition takes place between undertakings. (ASEAN Regional Guidelines, §3.2.3.2)
• “Relevant product market” (reference to product includes services) is the first element to take into account for determining the relevant market. It is defined by identifying the range of products or services which are regarded as interchangeable or substitutable by the customers, by reason of their characteristics, price and intended use. (ASEAN Regional Guidelines, §3.2.3.3)
• “Relevant geographic market” is defined as the area in which the enterprises concerned are involved in the supply and demand of the relevant products or services, which customers view as interchangeable or substitutable, and in which the conditions of competition are sufficiently homogeneous and can be distinguished from those of neighbouring areas because the conditions of competition are appreciably different than in those areas. (ASEAN Regional Guidelines, §3.2.3.4)
2. Definition of relevant markets
3. Product and geographic market definition• Seasonal markets• Temporal markets• Secondary markets (upstream, downstream)
2. Definition of relevant markets
4. Relevant markets in the Draft Competition Law of Myanmar
“Relevant Market means Goods or Services which are regarded as interchangeable or substitutable by the consumer, by reason of the Goods' characteristics, their prices and their intended use, and which are supplied in a geographic area by the Undertakings concerned, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas.” (Draft Competition Law of Myanmar, §2(p))
Main approach: Define the relevant product market first using demand substitution, then define the geographic market
2. Definition of relevant market4. Relevant markets in the Draft Competition Law of Myanmar• For the determination of substitution in defining relevant product
market, the draft law refers to:– Characteristics– Use purpose– Price
of goods or services• For defining the relevant geographic market, one have to determine:
– Sufficiently homogeneous (similar) competitive conditions within one geographic area
– Appreciably different from neighbouring areas
Considering other business establishments that supply the relevant product(s) within the area or in neighbouring areas, transportation costs or costs of service provision, barrier(s) to market entry
2. Definition of relevant markets
4. Relevant markets in the Draft Competition Law of Myanmar
• Barriers to market entry:– Technical or technological matters– Financial matters– Administrative decisions by State administrative
bodies– Laws and regulations– Tariff and non-tariff barriers– Consumer practices– Others
3. Analysis of Market Power
Dominant position
Definition by the European Court of Justice• 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.
Definition in the ASEAN Regional Guidelines• “Dominant position” refers to a situation of market power, where an
undertaking, either individually or together with other undertakings, is in a position to unilaterally affect the competition parameters in the relevant market for a good(s) or service(s), e.g., able to profitably sustain prices above competitive levels or to restrict output or quality below competitive levels.
3. Analysis of Market PowerMarket power
‘Market Power means the substantial degree of market position that an Undertaking has in a given Relevant Market as a result of various factors, including its high market share and that of its competitors; its ability to make pricing and other decisions largely independently from the competitive forces in the Relevant Market; and any barriers to entry to competitors into the Relevant Market of this paragraph.’ (Draft Competition Law of Myanmar, §2(o))
‘Market power is the ability of a firm to raise prices above its marginal cost.’(Massimo Motta, Competition Policy, Theory and Practice, Cambridge, 2004)
3. Analysis of Market Power
Note:- abuse of dominance or abuse of monopoly position: different terms for the same
- The ability of a firm to raise price above some competitive level – the benchmark price – in a profitable way
- Market power is a continuum, at some point dominance- Since the lowest possible price a firm can profitably charge
is the price which equal the marginal cost of production (firms have zero fixed costs), market power is usually defined as the difference between the prices charged by firm and its marginal cost of production.
3. Analysis of Market Power
Indicators of market power:- Market shares- Concentration Ratio (e.g. HHI)- Product differentiation- Barriers to entry and potential competition- Barriers to exit- Buyers‘ and suppliers‘ power- Financial power
3. Analysis of Market PowerMarket sharesGeneral measurement:
value and volume absolute and relative
‘Market share means a percentage or a portion of the Relevant Market’ (Draft Competition Law of Myanmar, §2(s))‘Market share’ refers to the quantity or value of the relevant products or services sold or purchased by one or more undertakings in the relevant market, as a percentage of the total quantity or value of those products or services in the relevant market. (ASEAN Regional Guidelines, §3.2.3.1)
Important to note:- Should know how shares evolve over time, as indicator of likelihood that
shares remain similar or change dramatically- Shares serve as input to producing HHI index- High market share alone does not mean ‘market power’
3. Analysis of Market PowerMarket shares- Market shares > 50% strong indication for dominance
- Market shares > 40% relevant and significant if taking into account:
- changes in the absolute level over time- level relative to the nearest competitor- presence of other factors
- Market shares between 30 and 40% fall below level of assumption and more evidence (substantial disparities in market shares, significant barriers to entry, etc.) would be required
- Market shares < 30% normally no dominance except exceptional conditions
3. Analysis of Market PowerConcentration Ratio- „two firm concentration ratio“ (C2) or „four firm concentration
ratio“ (C4)- Herfindahl-Hirschman Index (HHI) is a measure of
concentration Definition: n firms, each with share si
Example: 5 firms with 15%, 15%, 20%, 20%, 30% market shares
HHI=225+225+400+400+900=2150
n
iisHHI
1
2
4. Abusive PracticesStandard categorization of different types of abuse:- Exclusionary practices
Price-related conduct- Predatory pricing- Price discrimination- Fidelity rebates and similar practices- Margin squeeze and cross-subsidisation
non-price related conduct- Discrimination- Refusal to supply- long-term exclusive dealing
- Exploitative practices Price-related conduct
- Excessive pricing non-price related conduct
- Tying and bundling
4. Abusive PracticesExclusionary practices- price related conduct
Predatory Pricing
Predatory Pricing is in essence the setting of prices by a dominant firm at a level which has, as its commercial rationale, the elimination of or serious weakening of a competitor rather than the generation of profits. Price discrimination
Price discrimination involves the treatment of like cases differently or giving the same treatment to cases that are in fact different.
4. Abusive PracticesExclusionary practices- price related conduct
Fidelity rebates and similar practices
Special financial rebates or discounts granted by dominant firms in return for securing all or an increased proportion of the business of customers may are abusive in the lack of objective justification. Margin squeeze
A vertically integrated firm, which is dominant on the upstream-market, favours its own downstream operations against downstream competitors by charging the latter input prices at a level which leaves them a insufficient margin.
4. Abusive PracticesExclusionary practices- non-price related conduct
Discrimination
Discrimination (in other aspects than prices) is the treatment of like cases differently or giving the same treatment to cases that are in fact different (e.g. nationality). Refusal to supply
A dominant firm refuses access to the product market on which it is dominant and thereby restricts or prevents competition on another market, normally a market which it has also an interest but its market position is considerably weaker.
4. Abusive PracticesExclusionary practices- non-price related conduct
Long-term exclusive dealing
Entry by a dominant firm into long-term exclusive contracts may constitute an abuse because of making other parties dependent on the dominant firm, reducing competition from its existing competitors and deterring new entrants.
4. Abusive PracticesExploitative practices- price related conduct
Excessive pricing
Excessive pricing by a dominant firm can be abusive as it will achieve larger profits than it would earn in a more competitive environment.
- non-price related conduct Tying and bundling
Tying or bundling occurs, where a dominant firm compels customers buying one product to also acquire another completely distinct product.
4. Abusive PracticesAbusive Practices according to the Draft Competition Law of Myanmar§17. Without any reasonable objective justification, an Undertaking, which has market power in any Relevant Market, shall not conduct any of the following activities that could affect the Myanmar market:a) selling Goods or providing Services at a price which is lower than the production
cost, with the object or effect of driving its competitors out of the market; ( Predatory pricing)
b) selling Goods or providing Services at an unfairly high price; ( Exploitative pricing)c) buying Goods or Services at an unfairly low price; ( Exploitative pricing)d) refusing to supply, or altering the quality of, Goods or Services that it supplies, or
limiting access to the market to competing Goods, or hindering the development of science and technology; ( Refusal to supply)
e) imposing different trading conditions to third party Undertakings being in similar conditions, or imposing similar trading conditions to third party Undertakings being in different conditions; ( Non-price Discrimination)
f) imposing unfair rules on other Undertakings when entering into a contract for Goods and Services, or coercing the other Undertaking to accept liabilities which are not directly related to such agreement; ( Unfair trading conditions)
g) blocking new entrants into the market by any means. ( Market foreclosure)
5. Efficiency Defenses
Efficiency defenses (“legitimate business reasons“), examples:- Cost minimization (economies of scale)
Economies of scale Transaction costs
- Internalization of external effects
→ No exemptions or efficiency defenses allowed in the Draft Competition Law of Myanmar
Abuse of Dominance
