Assessment of Dominance (SMP) for Relevant Markets Susceptible to ex-ante Regulation. Peter...
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Transcript of Assessment of Dominance (SMP) for Relevant Markets Susceptible to ex-ante Regulation. Peter...
Assessment of Dominance (SMP) for Relevant Markets Susceptible to ex-
ante Regulation.
Peter Alexiadis
Partner
Gibson, Dunn & Crutcher LLP/Brussels Office
A presentation for the ITS 15th Biennial Conference
Berlin, 4-7 September 2004
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Table of Contents
I. Individual Dominance
II. Collective Dominance
III. Leveraged Dominance
IV. Conclusions
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I. Individual Dominance
Legal Standards of Dominance
“The dominant position referred to in Article [82] 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 consumers”.
• Case 27/76, United Brands v. Commission
“The existence of a dominant position may derive from several factors, which, taken separately, are not necessarily determinative but among these factors a highly important one is the existence of very large market shares”. • Case 85/76, Hoffmann-La Roche / Commission [Other factors include: size of operations, wide geographical presence, financial resources, vertical integration, product range, essential facilities.]
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I. Individual Dominance
Legal Standards of Dominance
“… although the importance of the market shares may vary from one market to another the view may legitimately be taken that very large market shares are in themselves, and save in exceptional circumstances, evidence of a dominant position.” • Case 85/76, Hoffmann-La Roche / Commission
“Without going into a discussion about percentages … [dominance] must be determined having regard to the strength and number of the competitors”.
• Case 27/76, United Brands v. Commission
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Criteria of dominance emerging
from case-law and
administrative practice
Market shares
Degree of dependence of customers or suppliers
The structure of the firm itself
Technological resources
Production capacity
Access to raw materials
Financial strength
The conduct of the firm on the market
I. Individual Dominance
The structure of the relevant market
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Relevance/Limitations
of Market Shares
Proxy for market power (extent of negative impact on the market)
Absolute market shares> 40%> 50%
Relativity of market shares
Stability/volatility
“In” and “for” the market (innovative markets)
No substitute for full economic analysis
I. Individual Dominance
7
Immediate/Actual
Competitive Constraints (1)
Number of competitors / size / gaps
Efficiencies of competitors
Raising rivals’ costs
Existing regulatory obligations
Switching costs
Market share movement
Barriers to expansion
Effectiveness of actual competition
I. Individual Dominance
Profitability / ROCE
Network Effects
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Immediate/Actual
Competitive Constraints (2)Competitors compared to
market leader with
Absolute size / “deep pockets”
Technological advantages
Access to capital
Sales / marketing relationships
IP rights
Vertical integration / control of infrastructure
Economies of scale / scope
Market conduct
Information asymmetries
I. Individual Dominance
Firm cultures
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Countervailing Bargaining
Power
Nature of buyer
Customer knowledge / indifference / information asymmetries
Switching costs
Efficiencies of customer response (theoretical/actual)
I. Individual Dominance
Wholesale / retail
Individuals / groups
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Potential Competition
Entry Barriers / Exit Barriers
Innovation characteristics
History of new entry / effects of new entry
Sustainable entry or expansion / associated risks / costs of entry
Likely response of dominant firm
I. Individual Dominance
Regulatory
Strategic
Timeframe for analysis / likelihood of entry
Shifts in value / incentives to integrate / incentives to consolidate
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Market Share Evaluation (Empirical issues)
Data
Sources
Parties, competitors, customers, buyers, suppliers, trade associations, market research report
Measurements Revenues, volumes, production capacities, inputs depending on markets concerned and available data
I. Individual Dominance
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Level of Assessment – Examples from the Consultation Process
Austria / Fixed transit services -> Market shares / Alternatives to ubiquitous network in absence of regulation.
UK / Call termination on individual fixed networks -> Monopoly provider / Barriers to entry (cost efficiencies) /BT’s countervailing buyer power.
I. Individual Dominance
UK / Leased lines markets -> Market shares (high and stable) / Technological advantages or superiority /Barriers to entry / Economics of scale and scope / Absence of countervailing buyer power / Lack of actual and potential
competition / Evidence from international benchmarking.
Austria / Mobile access and call origination -> Decreasing market share / High entry barriers / No barriers to expansion(finance / infrastructure / technology / vertical integration of competitors) / High level of substitutability /
Market transparency / Degree of countervailing buyer power.
UK / Mobile voice call termination on individual networks -> Market share / Entry barriers / Excessive prices and profitability / Countervailing buyer power & “calling party pays” arrangements /
Need to take into account pricing behaviour.
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I. Individual Dominance
Level of Assessment – Examples from the Consultation Process
Finland / Leased lines markets -> Market shares / Control over infrastructure / Vertical and horizontal integration /Actual and potential competition / Product range / Established customer relations / Economic strength.
Finland / Call termination on individual mobile networks -> 100% market share / Control over network / Horizontal integration / Lack of actual and potential competition / Financial strength.
Finland / Mobile access & call origination -> 60% market share relative to competitors (29 : 10.5 : 0.1%) /High entry barriers / Economics of scale & scope and financial strength / Relationship with ISP / No countervailing buyer power.
Finland / Public fixed telephony for residential & non-residential customers ->Market shares / Prices / Other market data / Lack of consideration of existing remedies.
Finland / Public fixed international telephony for residential & non-residential customers ->Market shares / Existing remedies.
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Level of Assessment – Examples from the Consultation Process
Ireland / Broadcasting transmission services -> Market shares / Barriers to entry / Absence of countervailing bargaining power / Lack of potential competition / Evidence of market behaviour.
I. Individual Dominance
Ireland / WBA -> Market shares relative to competitors / Market entry / Vertical integration / Credible alternatives.
Portugal / Retail markets for fixed telephony -> Market shares / HHI concentration index / Overall size ofmarket leader / Barriers to entry and expansion / Absence of countervailing bargaining power / Profitability.
Portugal / Fixed call origination & call termination on public telephone networks ->For origination: same criteria as for retail markets (above)
For termination: Monopoly position / Price levels / History of regulation / Profitability /Absence of countervailing bargaining power.
Greece / Call termination on individual mobile networks -> Market shares / Monopolistic market structure /Absence of potential competition (barriers to entry / technological alternatives / structural changes in market) /
Low countervailing buyer power / Anti-competitive practices.
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II. Collective Dominance
Discussion Items
Varying Approaches in different legal instruments such as Merger Regulation, Framework Directive,
Article 82 EC - different policy directions
Legal & Economic Concepts
Identification of Essential Elements
Burdens of proof under different legal instruments
Article 82Dominance / Conduct
Merger RegulationDominance / ???
Framework DirectiveDominance / Conduct
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Definitions
Collective/joint/oligopolistic
Concept of tacit collusion
A group of firms able to adopt through implicit collusion a
common policy on the market and to act to a considerable extent
independently of their suppliers & customers
Frequently examined in communications sector –
Vodafone/Airtouch, FT/Orange, BT/ESAT Telecom,
MCI WorldCom/Sprint, Roaming Enquiry
National cases: Meridian/Eircell, Telia Finland
II. Collective Dominance
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Essential Elements
Incentive compatibility
Credibility of co-ordination
Market concentration
Repeated interaction betweenfirms
Barriers to entry/exit
Market transparency
Retaliation measures
Lack of effective competitive constraints
II. Collective Dominance
18
MarketConcentration
Relationship between no. market players & respective market shares
Less market share spread/less no. market players –greater competition concerns
Greater no. of competitors increases complexity of interrelationships
Individual market shares/market share symmetries/relativemarket shares
Market share litmus test difficult to identify
Market share comparisons relevant where markets have“fundamentally similar characteristics”
Increasing use of economic indices e.g. HHI of Concentration Index
II. Collective Dominance
19
RepeatedInteraction
Interconnection Relationships
Trade Associations
Commercial Contacts
II. Collective Dominance
20
Collective dominance not of concern in markets with low entry barriers
Barriers to entry/exit
Anti-competitive prices would trigger market entry (long termor “hit and run” basis)
Technological barriers (e.g., local loop)
Legal barriers, e.g., spectrum and limited no. of licences
Regulatory barriers, e.g., price controls
Strategic entry barriers, e.g., long-term customer contracts
II. Collective Dominance
21
MarketTransparency
Each member must have the ability to know how other membersare behaving in order to adopt a common policy.
“Sufficiently quickly & precisely” (Airtours)
Age of information being exchanged
Transparency of additional factors (production capacity, sales, investments)
Price transparency
Actual prices & rates
Other market information from which prices
of sales can be derived
Public price lists, discount policies, inter-firm
transfers, industry association publications,
customer feedback
Price transparency & common costs
Homogenous products
II. Collective Dominance
22
Lack of EffectiveCompetitive Restraints
Actual Competitors
Market Entry
Customers
Unwillingness to tacitly collude
Cost/quality considerations; varyingprofit strategies or other asymmetries
Recent new entry can have a destabilising effect
Barriers to expansion
Supra-competitive profits attract market entry
Low barriers to entry/exit
Innovation
Maturity of marketplace
Other structural characteristics
Purchasing power
Awareness
II. Collective Dominance
23
RetaliationMeasures
“Cheating” firms must be capable of being retaliated against
Variety of retaliation mechanisms
Effectiveness of measures dependenton various factors
Reversion to normal competition
Price wars, targeted action or other legitimate business activities
Time period for competitor reaction
Frequency of interactions (e.g., price adjustments or access negotiations)
Structural elements of market (e.g., long termcustomer constraints)
Profit maximisation (e.g, short term/long term)
Whether market characterised by cost or quality synergies
II. Collective Dominance
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Level of Assessment
Dynamic vs. static approach
Margin of discretion
Purpose of various instruments: Article 82 EC, Merger Regulation, or Framework Directive
Rigorous economic analysis vs. checklist approach
II. Collective Dominance
25
Level of Assessment – Examples from the Consultation Process
Austria / Mobile access & call origination -> Decreasing concentration ratio / Asymmetric market share distribution (47 : 25 : 20%) / No evidence of foreclosure – cooperation agreements and airtime resale agreements negotiated commercially.
UK / Mobile access & call origination -> Derived market shares from retail level / Market shares measured in terms of subscriber numbers, call minute volumes, revenues, etc. - relevance of figures / International benchmarking of concentration measures – relevance of HHI measures.
II. Collective Dominance
26
AIRTOURS – Case Example
Collective Dominance test:
1. Transparency allowing monitoring
2. Existence of a punishment mechanism
3. Taking into account of reactions of customers and competitors
undermining benefits of collusion
Need of “convincing evidence” based on review of
level of competition” at the time of notification
Must not confuse acceptable oligopolistic interaction
with tacit coordination (e.g., “cautious” capacity
settlements)
Relevance of market change through acquisition
Avoidance of a “checklist” approach; need for factors
to facilitate coordination
II. Collective Dominance
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III. Leveraged Dominance
Authority
Article 14(3) Framework Directive
Clause 3.1.1, SMP Guidelines
Case-law
Remedies discussion, Relevant Markets Recommendation
28
TETRA – Case Example
Leverage test: 1. The competitive harm flowing from conglomerate mergers
is inherently more difficult to predict than cases of traditional horizontal mergers. Accordingly, a strong economic and factual analysis of affected markets is required to substantiate an allegation of leveraging of dominance. 2. Leverage theories continue to have a role to play in merger cases. In this regard, technological ties or product bundling through discounting might be the result of the leveraging of dominance, but:
the ability of a firm to leverage does not mean it will have the economic incentive to do so; it will often not be profitable for a firm to extend a strong position in a market to another;and the importance of alternative ex post remedies (e.g., under Article 82 EC) should be taken into account.
III. Leveraged Dominance
29
IV. Conclusions
Commission review is thorough. It is not a rubber-stamping exercise.
No substitute for economic analysis on the part of the NRA.
Market share data needs to be interpreted carefully.
Different emphases regarding factors relevant to wholesale and retail markets.
Impact of self-supply issues on SMP assessment.