The Concept of Dominance

Contents

Page
Introduction / 2
The Concept of Dominance / 2
What is meant by a dominant position? / 2
What is Market? / 3
Why market is important in competition regulation? / 3
Relevant Market / 4
The Product Market / 4
Relevant Geographic Market / 6
Commission’s definition of the relevant geographic market: / 6
The SSNIP Test / 7
Determining the Dominance / 7
Market share: / 8
Barriers to entry: / 9
Conclusion / 11
Bibliography / 13

Introduction:

1- The aim of EU competition policy is based on two concepts: defining market and assessing dominance. Article 81 and 82 are the main competition provisions of the European Commission Treaty. Both articles pursue a common general objective. Article 81 prohibits all agreement between undertakings and concerns which may affect trade between member states. The aim of article 82 is to deal with monopoly and market power. It focuses on undertaking which hold dominant position. In this essay, I will define the concept of dominance and then I will assess article 82 which prohibits the abuse of dominant position.

The Concept of Dominance

2- The classic definition of dominance was expressed by European court of justice in case United Brands V. Commission[1]: “A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained in the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”

3- The court in defining dominance, focused on the ability of a dominant undertaking to act independently of its competitors, customers, and consumers and to prevent effective competition.

What is meant by a dominant position?

4- A dominant position means that a supplier usually has a powerful economic position making it possible for the undertaking to prevent effective competition by acting independently of its competitors and customers and ultimately of its consumers.[2] The main indicator of dominance is a large market share; other factors include economic weakness of competitors, absence of latent competition and control of resources and technology. In addition, we have to determine market share, accordingly, we have to know the size of market.

5- The Commission and the Court have stated that in a dominant position an undertaking act independently on the market. Following this definition, United Brand[3] and Hoffmann la Roche were assumed by the European Court of Justice to be dominant supplier.

6- In fact, dominant position can be determined in relation to a market and competition can be determined in relation to products and their characteristics that makes them interchangeable or substitutable with other products on a market. Hence, European Court of Justice in Continental stated: “the definition of relevant market is of essential significant.”[4]

What is Market?

7- There are different definitions for market. In the Harper Collins Dictionary of Economics it is defined as: “Market is an exchange mechanism that brings together sellers and buyers of a product, factor or production or financial security”. It is further added that: “Economists define a market as a group of products consumers view as being substitutes for one another.” However, a market can also be defined as the amount of total sales of a particular product.

8- Market definition is a necessary and fundamental starting point in investigations about the abuse of market power. The definition of the concept of market is different in economic terms and for competition Purposes.

Why market is important in competition regulation?

9- The aim of competition policy is to ensure that markets work efficiently. For instance, if two firms have equal market power, it can be said that the market and competition are efficient. In other words, the way a market works is by protecting competition. So, it is necessary to define dominant position in the market. Furthermore, Competition policy investigations also require that the limits of the relevant market be determined carefully.

10- The EC Treaty does not say anything about definition of the market. Therefore, the Commission defined the market, and besides, it noted that definition of relevant market is needed. [5]

11- The Commission defined the relevant market for the purpose of the Community Competition Law as follows: “Market definition is a tool to identify and define the boundaries of competition between firms. It services to establish the framework within which competition policy is applied by the commission. The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertaking involves…”[6]

12- Defining the relevant market requires identifying the set of products that compete with each other. In addition, the purpose of defining the relevant market is to assess whether firms possess market power or dominant position.

13- Market power or dominance is more likely to exist in situations where firms have large market shares relative to their competitors and where there is limited scope for entry into that market. Market shares and potential market entry, however, can be determined only after the relevant market has been defined.

Relevant Market

14- The purpose of defining a relevant market is to identify those products and services that are close substitutes for one another and that they operate as a competitive constraint on the behavior of suppliers of those products and services. By defining the relevant market, the scope of competition and abuse of dominant position are also determined. Competition can be defined from buyer side that is said: “demand side” or from seller side which is said: “supply side”. Commission defined relevant market that combine the product market and the geographic market.

The Product Market

15- Economist define product market as a group of products that can be substituted or interchanged by the consumer with regard to their characteristics, prices, and intended use.

16- Accordingly, ECJ poited out the term of interchangeability. In the case of Hoffmann-La Roche, it focused on this term. The Commission stated: “A relevant market comprises all those products and/ or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products characteristics, their prices and their intended use.”[7]

17- Interchangeability means that a set of products are considered by consumers to have similar characteristics. These characteristics may be the price or their intended use. This means that from a consumer point of view, a product substitutes another product if it can be used in the same way. On the contrary, some products, even if they can be used in the same way, because of their prices, they cannot be substituted with other products.

18- Hence, interchangeability or substitutability is important from both the demand and supply side.

19- The Commission in Articles 85 and 86 of the Treaty, in particular in section 6 of Form A/B, has defined the relevant product market as follows:

20- "A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use."[8]

21-In the United Brands case, the ECJ illustrated the concept of relevant market that implied effective competition between the products in this market. The US company argued that there was sufficient degree of interchangeability between the product i.e. Banana and other fresh fruit.

United Brands & Co Case[9]

22- United Brands Co, is a US company which produces banana. The Commission found United Brands abused its dominant position in the banana market. They argued that banana were interchangeable with other fresh fruits such as apples, oranges , grapes , peaches, strawberries, etc. but Commission refused their argument and stated that because of their physical shape and economic characteristic[10] they are not interchangeable. The Commission also relied on the Food and Agriculture Organization Studies that found “low cross-elasticity”[11] between banana and other fruits. In addition, the Court reasoned that, banana formed a very important part of the diet of a certain section of the society. [12]

Relevant Geographic Market

23- The definition of the relevant geographic market used in the European Antitrust Regulations, originates from the United Brands case (case 27/76, ECR 1978). It was stated: “The discrete territory within the community in which the goods or services in question are offered and in which the competitive conditions are sufficiently homogeneous to permit estimation of the economic strength of an undertaking.”[13]

24- A geographic market is the area in which substitution occurs. Therefore, undertakings can not increase the price in the area where consumers can buy a substitute instead of buying from another area.

Commission’s definition of the relevant geographic market:

25- “A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous and can be distinguished from neighboring areas because the conditions of competition are appreciably different in those areas”[14]

26- Geographic market depends on a number of factors. One of them is transportation. For instance, if the transportation is not expensive for a product and has a profit for the consumer to buy the product from other place, the breadth of market for this product is extended.

27- Nature of the product is the other important factor. If product cost is cheaper than transportation, the geographic market would be narrow. For instance, the geographic market of some products like diamond or microchip is very wide. Therefore, two factors, i.e., transportation and nature of the product are very important for determining the relevant geographic market.

28- It should be mentioned that, the Courts and Commission make distinction between Competition Laws and intellectual property Acts.

The SSNIP Test

29- In 1984, the US Department of Justice Merger Guidelines set out a ‘hypothetical monopoly test’. This test was designed for assessing the market power and for defining antitrust market in the USA. In 1997, the Commission stated the importance of SSNIP or the hypothetical monopoly test in measuring “a sufficient degree of interchangeability.”[15]

30- SSNIP [16] stands for “small but significant and non-transitory increase in prices”. By using the SSNIP test, it is determined “whether a small (5-10 percent) but non- transitory increase in the price of a product would cause consumers to buy another product instead” [17]. It can be said that, an increase in the price of product A (if the price is not profitable) would lead the consumer to buy product B instead, if A and B are available in the same market.

31- In fact, SSNIP test focuses on the price changes between Substitutes and Complements.

32- The formula for SSNIP test or Cross Price Elasticity of Demand is as follows: % change in the demand for Good A divided by % change in the price of Good B.

Determining the Dominance

33- After determining the relented market, it has to be cleared whether the firm has a dominant position in the relevant market. Some factors are important to establish the dominance. Some of them are as follows:

1-  Market share

2-  Barriers to entry:

a)  Access to raw materials and markets

b)  Financial and technical resources

c)  Economies of scale

d)  Behavior

e)  Access to financial resources

f)  Access to key inputs

g)  Profits

Market share:

34- In the case of telecommunication, according to the ECJ, the percentage of the market owned or controlled necessary to constitute a dominant position is not static. ECJ held a firm with market share of 10% is close to be dominant.

35- In some cases, the ECJ has found a dominant position in cases ranging from ninety percent market share, and in United Brands case only a forty to forty-five percent market share.[18] [19]

36- In United Brands the barriers to entry for other firms were high, thus, United Brands had dominance for banana over four years. The ECJ held that, market share of 45% together with other factors is enough to hold a firm dominant.

37- In Hoffman La Roche, the ECJ held that Roche has a market between 64% to 90% , and also, commission stated that Roche was dominant on market share combined with additional factors are enough for the existence of dominant position.”[20] In this case the court expressed market share by value and quantity over three years.[21] The court defined the market share of various vitamins as follows:

1-  between 75% to 78% is indicative of dominant position

2-  between 84% to 90% dominant position exist

3-  between 93% to 100% has a monopoly.

38- Further more, market share under 70% with other factors can be considered as dominance.

[22]

39- Therefore, the court stated where an undertaking has a high market share, “there is a presumption of dominance.”[23]

Barriers to entry:

40- Barriers to entry are some factors that act as obstacles in the way of potential newcomers to enter the relevant market. Large market share, control of essential raw materials, large capital requirements to set up a firm, strong consumer preferences for the products of established firms are among barriers to entry. These Barriers to entry, as the ECJ and Commission put it, are very important as the result of which firms may be dominant even if they lack large market share.

41- Economists believe that firms are dominant if barriers to entry exists. As Stilger stated: “It is a cost which must be borne by a firm that seeks to enter an industry but it is not borne by firms already in the industry”.[24] But, the US Chicago School of Economics, has wider definition of barriers to entry: “anything , which has an effect of impeding entry to a market, even if the incumbent had to incur similar expenditure when it entered the market.”

42- A- Access to raw material and markets:

A firm which has high percentage of the product and distributive process and acting independently has more potential to be dominant than undertaking which is dependent on other material like raw materials.[25]

43- B- Financial and technical resources:

An undertaking with substantial financial resources can have dominant position and can eliminate competitors. Also superior technology possessed by an undertaking may operates as barriers to entry.[26]