competition policy (cp) goals
1st cp goal: EW (total surplus= total welfare standard[TWS) = ewwpi goal
Economic Welfare is the standard concept used in economics to measure how well an industry performs. It is a measure which aggregates the welfare (or surplus) of di@erent groups in the economy. In each given industry, welfare is given by total surplus, that is the sum of consumer surplus and producer surplus. The surplus of a given individual consumer is given by the difference between the consumer’s valuation for the good considered (or her willingness to pay for it) and the price which effectively she has to pay for it. consumer surplus (or consumer welfare) is the aggregate measure of the surplus of all consumers. The surplus of an individual producer is the profit it makes by selling the good in ąuestion. Producer surplus is therefore the sum of all profits made by producers in the industry.
an increase of the price at which goods are sold, reduces consumer surplus and increases producer surplus. but…as the price increases, the increase in profits made by the firms does not compensate for the reduction in the consumer surplus. Hence, welfare is the lowest when the market price equals the monopoly price (the highest price firms might want to charge), and the highest when it equals marginal costs of production.
ew is a measure of how efficient a given industry, and does not address the ąuestion of how eąual or uneąual income is distributed.
•Consumer welfare (consumer surplus)
in most circumstances practices that decrease total welfare also decrease consumer welfare and vice versa (this being the case for cartels, for instance), but not always:
For instance, a merger that allows the merging firms to decrease their fixed costs, might increase total welfare (due to larger profits) while increasing prices and thus decreasing consumer welfare.
Consumer welfare v. total welfare
It is difficult to say whether competition authorities and courts favour a consumer welfare or a total welfare objective.
In the EU, Art. 81(3) allows any agreement, decision or concerted practice ”which contributes to improving the production or distribution of goods or to promoting technical or economic progress, must allow consumers a fair share of the resultsng benefit “
Art. 2.1 of the eu Merger Regulation accepts an ED [efficiency defence] ”provided that it is to consumers’ advantage“.
These provisions might indicate that consumer welfare is the ultimate objectives of eucl
In the US, both the courts and the anti-trust agencies tend for a consumer welfare standard too, as far as mergers are concerned.
In other jurisdictions, such as in Canada, Australia and New Zealand, competition authorities seem instead to lean towards a total welfare standard
Imagine, for instance, that a certain consumer good is usually bought by 100,000 consumers per year, each of which buys only one unit, usually sold at a price of 100 euro. If the two firms producing this good were able to influence the government to enforce a regulation which increases the price by 10% (for instance, through protection from foreign competition, or through authorization of a collusive agreement), this would bring about huge collective losses for these consumers as a whole, but individual losses (10euro) are probably not large enough for consumers to decide to stand up to defend their position. On the contrary, the two producers would have large individual gains from such a move, and so they would be ready to employ considerable resources to lobby the government/cma/ec, into adopting the regulation. The cma should block such ua. Therefore, attaching a heavier weight to consumer surplus [than to producer surplus] help redress the balance towards consumers.
also, merging firms enjoy information advantages (particularly on the efficiency gains associated with the merger) over the gov/cma/ec, and that the adoption of a consumer welfare standard (that is, accepting the merger only if it increases consumer welfare, no matter the effects on profits and therefore on total welfare) counter-balances this asymmetry.
Another argument in favour of the consumer welfare standard [CWS] is that it is simpler than the total welfare standard. A TWS [total welfare standard] would entail a difficult exercise of ąuantification of the changes in consumer surplus and in profits, to get the net effects on total welfare. A consumer welfare standard, instead, only needs an assessment of the effects on prices.
however, the CWS should not be adopted by cma/ec, why?:
1/consumer welfare does not take into account the gains made by the firms….. consumers often own (partly or fully) firms, directly or through pension and investment funds. Accordingly, dividends are distributed to a vast number of citizens who would be hurt if profits were reduced. If the adoption of a consumer welfare standard were intended to favour ”citizens“ as opposed to ”firms“, it would not be clear that such a goal would be achieved
2/maximising consumer surplus would lead to pricing at marginal costs, with firms exiting the industry in the long-run or having to be subsidised to cover fixed costs, and the market would then be replaced by regulation.
3/lower prices and profits deprive firms from incentives to innovate, invest, and introduce new products.
I prefer the tws. Therefore, in this book i apply the TWS
2nd cp goal: Defence of smaller firms
The favourable treatment of small firms does not necessarily contradict the ewwpi goal, if it is limited to protecting small firms from the abuse of larger enterprises, or giving them a small advantage to balance the financial and economic power of larger rivals.
However, artificially helping small firms to survive, contradicts ewwpi goals, as it encourages inefficient allocation of resources and would contribute to high prices.
ec: thinks that (SMEs) are more dynamic, more likely to innovate and more likely to create employment than large firms. However, this is incorrect.
cma/ec should not waste their scarce resources to monitor smes, nor should they use cp to help SMEs.
3rd cp goal: Promoting market integration
= prohibition of price discrimination across eu countries
This goal is not necessarily consistent with ewwpi. EU competition law de faGto forbids price discrimination across national borders. There is no economic rationale for such a di@erent treatment.
Imagine that the same good is sold in two countries, say Germany and Portugal. Germans have on average a higher income and willingness to pay for the good than Portuguese. If price discrimination is allowed, a monopolist would sell in portugal at lower price.
but, if, [as per eu market integration], the monopolist was obliged to set an identical price on the two markets, Germans would be better off
However, the monopolist may choose to continue to charge the price it was charging in Germany for both markets. It would lose completely the Portuguese market but it would keep the highest profit in the German market, so that this strategy might well be more profitable than selling at an intermediate price in both markets.
If this last option is chosen, then the prohibition of price discrimination across eu countries achieves the opposite effect than intended: differences in the market conditions between Germany and Portugal end up with being much more pronounced than before.
thus, this goal is not justified on ewwpi grounds.
4th cp goal: economic freedom
this goal contradicts the ewwpi goal….Particularly in vertical restraints, for instance in contracts imposed by a manufacturer upon the retailers. they limit the economic freedom of the retailers.
5th cp goal: Fighting inflation
it seems doubtful that cl might efficiently be used to attain such purposes. If firms are colluding, then breaking a cartel would give a one-time reduction of prices, rather than contributing to a permanent decrease of inflation. Further, firms would react to a common shock on the prices by simultaneously increasing prices, even in the absence of any collusion
6th cp goal: Fairness and equity
price controls by authorities are not desirable in markets with free entry, apart from exceptional cases. In general, a firm should be free to charge the prices it wants, and if it enjoys market power because of its merits (be they investments in R&D, advertising, or whatever other business strategy) there is little reason to oblige it to give discounts to consumers who are willing to pay a high price….. competition from new entrants will appear and prices will move downwards….2 caveats:
a. in a monopoly, price intervention would be justified. Usually, such markets should be subject to regulation, but if for some reason sector regulators do not exist or fail to intervene, intervention by cma/ec might be justified.
b. it would be preferable if cma/ec restored market competition (the cause of the problem), rather than to set a ceiling to prices.
fairness may collide with an ewwpis. eg. the issue of small shopkeepers v. large supermarket chains. concern that the supermarket chains buy bigger volumes and so, much cheaper than small shops. This allows the supermarks to sell at lower final prices. some argue that this is unfair, and that small shops should be protected. but…Whenever there exist economies of scale in a market, larger firms will have lower costs and will be more competitive…That the most efficient firms will stay in the market is beneficial for a community as a whole, as it will bring market prices down to the benefit of consumers. limiting the ability of larger firms to charge lower prices would damage welfare.
Note, however, that fairness and efficiency are not always in contradiction.
consider a variation of the previous example, and
suppose that a supermarket chain which already has a very high share of the market (say, 70%) systematically charges below costs with the aim of forcing all small rivals out…this practice (that is called predatory) is both unfair and welfare detrimental because when they are out, the supermarket chain will start to charge monopoly prices.
ex ante eąuity (that is, the fact that firms have the same initial opportunities in the marketplace) is compatible with cp, which should guarantee a level−playsng field for all the firms.
ex post eąuity (that is, eąual outcomes of market competition) is not cp
7- Other cp goals
Social wpi goals
Competition rules have sometimes been relaxed to smooth social tensions. US laws were implemented in a more lenient way in the times of
eg in the usa Great Depression, many anticomps were allowed ..these ”crisis cartels“ are also sometimes tolerated by the EC...However, allowing firms to colludeis a remedy worse than the problem itself. it would be better to intervene in the banking and financial sphere.
Political wpi goals
eg. When the Allied Forces decided to break up industrial groups in Germany and Japan,
calling for a less concentrated distribution of resources is also justified on fairness grounds, to reduce ineąuality in income distribution
Environmental wpi goals
articles 6 and 174 of the eu Treaty. In a recent decision (GEGED ), ec approved an agreement among producers and importers of washing machines which together account for more than 95% of European sales. However, the Commission considered that the agreement will benefit society in environmental terms, allowing to reduce energy consumption….it was allowed also because the agreement did not remove many other competitive instruments at the firms’ disposal (prices, technical e@ectiveness, brand image, advertising, and adoption of energy-saving levels).
but the same purpose could have attained , instead, by the imposition of taxes which discrimi- nate against more environmental damaging machines or the imposition of a minimum environmental standard.
Strategic wpi goals: industrial and trade policies
eg. Supporting natsonal Ghampions (via lax cps – eg. usa allows export cartels), or breaking up foreign champions (via strict cps)
strategic trade policy considerations lurk behind cl and cp.
eg. anti−dumping laws: to stop foreign firms selling below their costs (i.e., that they dump their goods) to the detriment of national firms. These laws are justified on fair trade grounds, as it could be predatory behaviour, but these laws are mostly to protect domestic firms from more efficient foreign firms.
Industrial policy and trade policy considerations have often been an obstacle to the enforcement of competition policy.
My view is that competition policy is the best [and should be the only ] industrial policy
Of course, the clearest case where strategic trade policies are at work is when a country’s government subsidises domestic firms. This distorts competition in the marketplace and has detrimental effects, since allow inefficient firms to survive at the expenses of efficient ones.
CP: a definition
”the set of policies and laws which ensure that competition is not restricted to reduce ew“….This does not imply that non-economic policies are not important, but that they should not be pursued via competition policy, as distorts competition
EU CL
Articles 81 and 82 of the Treaty have ”direct applicability“: this means that they are part of the law of each Member State and are directly enforceable by national courts and national cmas, and by dgcomp [cfi] at eu level, which hears claims v ec cl decisions. Appeals go to ecj.
•Article 81: horizontal and vertical uas.
- Horizontal uas [among competitors], usually restrict competition and thus reduce welfare and should therefore be prohibited, apart from very specific cases (eg innovation uas]
- vertical uas [between firms at di@erent stages (for instance, a manufacturer and a retailer) are often efficiency enhancing and only may be anticomp if are by firms with considerable market power.
To treat agreements so di@erent with the single same art.81, brings problems…..thus, Regulation 2790/1999 introduces a block exemption from article [81(1)=prohibitions] on vertical restraints, subject to
(i) a market share criterion:
The block exemption is limited to vertical agreements in which the market share of the supplier is below 30% (in case of agreements containing an exclusive supply obligation, it is the buyer’s market share which may not exceed 30%]
(ii) a ”black-list“ of clauses which are not exempted
resale price maintenance (clauses which fix, directly or indirectly, resale prices) and (some types of) territorial restrictions which might lead to market partitioning by territory or by customer
Second, uas need not be written or formal to be prohibited eg. Concerted practises.
Third, such sectors as agriculture, defence, and (road, rail, inland waterways, air and maritime) transports, have been granted block exemptions from article 81(1).
Fourth, article 81(3) clearly states that even agreements among competitors do not fall under per se prohibition. Some horizontal agreements have been covered by ”block exemptions“. Eg research and development, or technology transfer uas.
EC has given up some of its ”monopoly power“ over article 81(3): national authorities and judges can now also give exemptions
Article82: adp :
The list of possible abuses is not exhaustive . Adp is exploitative behaviour (excessive pricing) , predatory pricing, exclusive dealing, refusal to supply, and tying
In Hoffmann− Ga RoGhe, ecj held : dominance is ”the power to behave to an appreciable extent independently of its competitors, its customers and consumers.“ dominance is a high degree of market power….adp types: ‘exclusionary practices; price discrimination across member states,; ”exploitative abuse“, [charging excessive prices to buyers (or extorting too low prices from suppliers).
a dom firm that is not abusive, might not engage in Aggressive competitive practices, as it has a ”special responsibility“.
Mergers
Both horizontal and vertical mergers are regulated by the Merger Regulation 4064/89 and successive modifications.
Each proposed concentration ( mergers and [takeovers =acquisitions] ] =( defacto control of the operations of another firm) ,should be notified to the Merger Task Force (MTF), a special unit of dgcomp, within seven days of the agreement or the announcement of the public bid. The MTF has then one month to investigate. In the end, The merger might be allowed, prohibited, or allowed subject to certain conditions, or remedies ( behavioural and/or structural remedies).
In Gontsnental Gan and ªhslsp Morrss, ecj held that article 81 and 82 might be used ex−post to deal with merger operations. It is to avoid this danger that the Mcr was introduced
The mcr follows the subsidiarity pple, whereby decisions should be taken at a decentralised level (i.e., by the national authorities) unless there are good reasons to take them at a centralised one (i.e., by the EC). The EC has jurisdiction on a merger if certain thresholds are met (see Art. 1). large firms with eu dimension
Mergers between ”small“ firms, and mergers which mainly interest a single country will be dealt with by national authorities .
article 2(3) of UK/EU mcr : duty to ban only those mergers that could potentially create or reinforce a DP [dominant position : is allowed] …….This is at odds with economic principles, since they also should ban mergers which do not create/reinforce a DP, but decrease welfare (usual in markets with few firms)
<> cocoo: challenge merger decisions on basis that should be blocked/notblocked
Market Power and Welfare
•Allocative efficiency. AE. = WELFARE CAUSED BY MAP
•Market power:MAP = prices charged – the marginal costs of production….. ”market dominance“ is where a firm has a large degree of market power, which allows it to charge prices which are ”close enough“ to those that a monopolist would charge.
•AI [allocative inefficiency of map/mop] : largemap/mop, leads to high prices, leading to a type of welfare loss called allocative inefficiency.
when prices are above marginal costs, this entails higher producer surplus but not higher enough to compensate for the lower consumer surplus caused by higher prices. Recall that welfare is defined as the sum of consumer surplus and producer surplus.
•Rent-seeking activities : competion (bribing, lobbying) for mop rents, causes welfare resources waste…Firms waste welfare resources in activities which do not have any social value, in the attempt to maintain or acquire mop
. Productive efficiency (pe) = economies of scale = type of welfare loss caused by the higher cost [caused by anticomps]…. this is why monopolists are less efficient :
First, managers of a monopolistic firm have less incentive to make effort [ managerial slack]
Second – a Darwinian selection argument . If a monopoly exists, the market will not operate any selection and an inefficient firm is as likely to survive as an efficient one.
•Number of firms and welfare
Since market power decreases with the number of firms in the industry, one might be tempted to conclude that the larger the number of firms the higher welfare. This is not the case when firms has fixed costs. fixed costs gives rise to scale economies. fixed costs implies that a higher number of firms entails more competition and lower prices, which increases cs and ae….but, it also entails a duplication of fixed costs, which represents a loss of (static) pe. Thus, the net effect of fixed costs on welfare is not clear thus, a policy aimed at maximising the number of firms in a market, would be unsound. If an authority tried not just to guarantee entry + competition on equal grounds + gave subsidies etc to promote entry [ artificially prevent firms from exiting], this would conflict with ew…thus, cl is about defending competition, not competitors.
Dynamic efficiency (de)
So far I have considered static, rather than dynamic efficiency [innovation]
a monopolist have lower incentives to innovate, thus adding de to the list of welfare losses
patents(ip) improve welfare, Because, Since firms are not able to appropriate the others’ R&D, they will invest more in R&D
the existence of some market power helps competition. It is precisely the prospect of enjoying some market power (i.e., of making profit) that pushes firms to innovate and compete.
The exante/postante efficiency trade-off is at the core of public policies: This is the trade-off between the necessity of granting firms the appropriability of their innovations and the desire that the benefit of such innovations spread to other firms and to consumers.
a. ex-ante efficiency (to preserve the firms’ incentives to innovate)
b. ex-post efficiency (once firms have innovated, all the firms should have access to the innovation)
Patent laws (and other intellectual property rights) is how govs commit not to expropriate an innovating firm ex-post. A firm knows that for a certain period of time it will be able to exploit fully its R&D results.
•Essential facilities (ef) = input
eg. In the airline industry, slots in an airport; for maritime transportations, a port’s installations; in fixed telephony, the local loop which links each home’s telephone with the network; for electrical power generation, the transmission and distribution network of electricity; for the production of pharmaceuticals, a certain chemical component; and so on.
Very often, an ef gives its owner a competitive advantage over rivals which have inferior inputs.
Competition authorities apply the efd (ess.facils.doctrine) too easily, deciding that the owner of the input had engaged in an illegal practice and was obliged to make the facility available to competitors….But there are a number of considerations before granting rivals access to a facility owned by a firm:
a. to which extent transport from ports other than port A is really such a poor substitute for the maritime route to the foreign country. Are really all the other ports so far away? Are their facilities so inferior?
b. supposing that there are no other existing ports which might provide a substitute route for transport to the foreign country, is it feasible for company Y to reproduce a similar investment and build (or improve) port facilities in another nearby town?….here it would not be enough to answer that it would be too expensive. It should be argued that there are no other towns in the area which are served by train and/or highways so that shipping would be impossible; or that the government would not authorise because of environmental of other reasons
c. it should also be checked that by letting rivals access the infrastructure, the owner of the facility would not find it more costly to produce. If, for instance, there is no spare capacity, then it would be more difficult to grant ef access.
d. Obliging a co to share its facilities with rivals would be an infringement of its property rights and would discourage similar investments elsewhere
Similarly, firms might obtain ip rights protection over an input without having made any innovation which is worth being protected.
-Magill case: a small company (Magill) was accused of infringing copyright of three TV chains because it had offered a weekly TV Guide that included the programmes of all the three broadcasters. held: the broadcasters own listings is not an innovation which deserves copyright protection.
-In IMS, a German firm (IMS)collected data about pharmaceutical products sales in Germany. To do so, it had divided the country into zones, thus creating a reference map that firms in the industry had helped to draw and were using. When a new competitor tried to offer the same map service, firms refused to use it, because they were accustomed to the old system, over which IMS claimed copyright. In this case as well, it is difficult to see the map as an innovation worthy of protection.
•Price controls and structural remedies
art. 82 of the EU Treaty, allow ec to intervene if prices set by a dominant firm are ”too high“. These are very dangerous provisions, for at least two reasons. First, deciding if a price is too high involves a high degree of arbitrariness. Second, why should a co be punished for it?
only if there are no sector regulators, then it makes sense for ec/cma to intervene, either by imposing lower prices or, by the use of structural remedies [measures that modify the property rights of a firm, for instance by imposing the disposal of certain assets (patents, brands, plants) or – even more dramatically – by breaking a firm into several units].
targeting firms because they are ”too profitable“ is wrong. High prices and high profits is just an indication that it is worth looking at the industry (in case there are cl violations)
•Internal growth (ig) vs. external growth (eg)
ig = where a firm acąuires market power and grows on the merits
eg= where a firm grows and acąuires market power because it takes other firms over (or merges with them). In this case, market power comes from direct elimination of competitors via compensation (that is, at the price of the takeover). cma/ec should prevent eg.
•will the market fixitall? (even monopolies?)
some say that a monopolist is unable to keep prices high because consumers anticipate that it will reduce prices in the future. Another says that if there is free entry, this will prevent the monopolist from setting high prices, as they would trigger entry.
this is wrong, because market forces alone are unlikely to reduce market power, (if sunk costs are important, if consumers have switching costs, if there are network externalities, if a monopolist can engage in anti-competitive practices). Unfortunately, even when entry is in principle free, reasons to worry about monopolies still exist….because monopolists have several instruments available, such as leasing, reputation, or various contractual clauses, to exercise all its market power.
•Switching costs
Another situation where market power does not necessarily decrease under free entry is when there exist consumer switching costs. There are many reasons why consumers might prefer to stick to products: learning costs [usually by firms using unnecessary artificially created complexity], or switching costs.
eg.fees charged by banks to close an account. airmiles are lost if switch airline, etc
switching costs decrease competition.
ec/cma should check that firm-created switching costs are not preventing competition. When de-regulating a previously monopolised sector, for instance, authorities should make sure that consumers are not locked-in by artificial switching costs (like when switching telephone provider would imply changing one’s telephone number). When analysing mergers, authorities should impose reduction on artificial switching costs that bring no cost savings.
•Networkeffects
Other industries where a monopoly might persist despite the absence of barriers to entry are those characterised by network effects: where consumers derive utility from the number of other consumers who choose the same product. If most consumers have already bought a given product, it will be difficult for new firms to attract demand. eg.youtube.
2 types of Network effects:
a. communications networks.
eg. telephones, email etc. One would not do much with a telephone if there were no other people with telephones with whom one could communicate.
b. hardware-software networks.
eg. a credit card network. As a card-holder, my utility is not directly affected by the number of other consumers using the same type of credit card. However, the larger the number of holders of the same credit card the more likely that shop-keepers will accept it. Similarly, a consumer’s utility from a given computer hardware (or a car, a washing machine, or a VCR) increases with the number of other buyers, since this will increase the likelihood that a better software will be developed (or spare parts, post-sales services, or video cassettes).
It is not enough to have a better product, or a lower price, since a crucial component is the number of (current and future) users of it. If the new product is not compatible with the established one, the firm has to convince prospective buyers that enough other buyers will buy it. The larger the number of consumers already locked-in with the current standard the more difficult will be its task.
incumbents can adopt strategies to delay or deter new entrants. First of all, incumbents will want to make sure that the new products cannot be compatible with theirs. As long as a standard is proprietary, this strategy will be legal. However, the incumbent might also engage in anti-competitive practices. For instance, faced with an entrant which offers a product with new features, an incumbent might announce that soon it will introduce an upgrade wtih these new features even if this is not true Such announcements impact on the expectation of consumers and should be carefully monitored by ec/cma, and punished if false
cma/ec could also force compatibility [same charging plugs etc]…However, this reminds us of patents and essential facilities (see above): Ex-post (that is, after a product appears on the market), the imposition of inter-operability sounds beneficial because it allows more competition. However, ex-ante (before a product appears on the market) it has an adverse effect of innovations
•Exclusionary practices
As we have seen, free entry does not guarantee that an industry will become less concentrated. In markets characterised by endogenous sunk costs, consumer switching costs or network effects, for instance, entrants will find it difficult to challenge successfully incumbents, even if the latter do not behave strategically.
When incumbents behave strategically, things turn even more difficult for entrants. A firm with large market power might engage in deterring entrants. Investing in extra-capacity, setting prices below cost, flooding a market with many different product specifications, foreclosing access of rivals to crucial inputs, bundling, price discriminating, tying,etc
Chapter 3: Market definition, and the assessment of market power
the definition of the market (both product market and geographical market) is a preliminary step to the assessment of market power – map.
Market definition
the ‘relevant market’ is not a set of products which ”resemble“ each other, but a set of products (and geographical areas) that exercise some competitive constraint on each other…eg. whether bananas are in a separate market, does not depend on physical characteristics, but on whether there exist other fruits that are substitutable enough to bananas so as to limit the possibility to raise the price of bananas.
The test to identify the relevant market, is the the SSNIP test (= hypothetical monopolist = Small but Significant Non-transitory Increase in Prices)
The ssnip test on Product market definition
Suppose that there exists a hypothetical monopolist that is the only seller of bananas. Would this hypothetical monopolist find it profitable to increase the price of bananas above the Gurrent level in a non-transitory way, say by 5-10%?
a. If the answer is yes, that price rise would be profitable. This will mean that bananas do not face significant competitive constraints from other products [= there are no other products that are substitutes enough to bananas, to lose much demand when it raises the prices of bananas]. Accordingly, the ssnip test says that bananas are a separate market
b. if the answer is no, bananas are not a separate market, as there exist other products that exercise a competitive constraint on sellers of bananas.
supply substitutability = when producers can switch production in a short period of time (say, up to six months or one year) if a price rise occurs. In this case, the competitive constraint originates from the price rise, attracting producers that are currently selling some other products.
Suppose for instance that we are considering a merger between the only two providers of bus services between city A and city B. the train is not a good substitute because there is no direct service between the two cities. According to demand substitutability, bus services between A and B are the relevant market. However, there are other bus companies active in both cities A and B. Although they are operating routes: cities C and D, and to the extent that it is not difficult to obtain a license to operate the A to B service, these bus companies will exercise a competitive constraint to prevent a profitable price rise on the route A-B. Accordingly, by also taking into account supply sustainability, the relevant market includes bus services in cities A,B,C, and D)
In forras/Sarrso, the EC found that paper manufacturers can easily and immediately change the degree of coating, to make paper of a higher or lower ąuality. thus, a wider relevant market was defined, by taking into consideration not just demand subst, but also supply substitutability.
Supply substitutability v. entry tkat constrains market power
conditions supply substitution to widen the relevant market:
– switching production must be easy, rapid and feasible.
-The producer of another good must already have the skills and assets to produce the product , it should not incur considerable sunk costs and any barriers to entry must be surmountable in a rapid and relatively cheap way.
-Supply substitutability cannot be invoked [to widen the market ]in markets for civil air transport services in the EU are usually defined route by route, say Brussels-Milan, Brussels-Munich, and so on…. because most airports are congested and obtaining landing and take-off slots is a lengthy and sometimes impossible process.
Likewise, the market for cola drinks cannot be widened by using supply substitutability , because important advertising campaigns are crucial to determine the success in the cola market, and these entail huge fixed sunk costs that make entry difficult and risky.
In the Nestlé/ªerrser case, the EC found that producers of soft drinks could have started to produce and sell immediately purified tap water. However, for such a product to compete with spring mineral waters, producers should have incurred huge advertising outlays, so that supply substitutability could not be invoked to include soft drinks in the same market as mineral waters.
why it is necessary to consider supply substitutability at the market definition stage ?
because there is no reason to delay the moment at which substitutes on the supply side are considered. Drawing the borders of the market in a narrower way than supply considerations would authorise, might force cma/ec to spend time in justifying why a firm with a considerable market share does not have considerable market power. In contrast, if immediate consideration of supply substitutability arguments leads to a correctly wider market, and accordingly, a low market share, there will be an immediate presumption of absence of market power.
•A problem in non-merger cases: tke“cellophane fallacy”
The use of the SSNIP test presents difficulties in non- merger investigations. Consider for instance article 82 under EU competition law, where a firm is investigated for alleged abuse of dominant position. here, the market definition test should not ask whether a hypothetical monopolist can increase prices in a small but significant way, relative to current prices, but relative to competitive prices. thus, the SSNIP test might lead to a too wide definition of the market, [because the firm has a dominant position], which might lead to a calculation of small market shares, and to a finding of no dominance.
This argument is the ”cellophane fallacy“, from the dupont case. The US Supreme Court maintained that the existence of high elasticity of demand between cellophane (sold by du Pont) and other wrapping materials (such as paper bags) called for a wide definition of the market, to include all possible wrapping materials. This decision was later criticised on the grounds that the presence of such a high elasticity of substitution indicated high market power by du Pont, who raised the price of cellophane so high that consumers would have considered inferior substitutes.
The cellophane fallacy argument calls for some caution in applying the SSNIP test in non-merger cases. Evidence that, say, a 5% price rise would lead to, say, more than a 10-15% decrease in demand, is not proof that the market delineation should be wider.
•Implementing tke SSNIP test
Own-price elasticity
to define a product market we need the own-price elasticity of demand = the percentage change in the ąuantity demanded that follows a one percent increase in the price of a product.; Suppose for instance that we are still interested in the merger between two sellers of bananas. Knowing that the own-price elasticity is, say, 0.2, one can infer that a 10% increase in the price of bananas will lead to a 2% decrease in the demand for bananas.
Since only a very small number of consumers will turn to other fruits (or stop buying bananas) the price rise is likely to be profitable. Hence, it would be appropriate to define the relevant market as the market for bananas.
When estimates of cross-price elasticities, say between bananas and any other fruit, are low, they will indicate that such products are not perceived by consumers as substitutes for bananas, and will suggest a separate market for bananas.
A market is the geographical area within which the price tends to uniformity…thus, if two products (or two geographical areas) belong to the same market, their prices correlate positively. …..for instance : if a shock increases the price of product A. If product B is in the same market (that is, it is a good enough substitute of product A), then its demand will increase, leading to an increase in its price too.
In Nestlé/ªerrser, the EC found that the correlation between prices of mineral water and prices of soft drinks, were either very low, or negative: in the five years before the investigation started, mineral water prices tended to increase, whereas soft drinks prices tended to decrease. This led the EC to (correctly) conclude that soft drinks did not exercise a competitive constraint on mineral waters. Similarly, in dupont/IGI, low correlation over time between the average prices of nylon and polypropylene meant that they were not in the same market.
Price differences
two products in the same market tend to have the same price.
the EC has used large differences in prices between two products as an indicator that they were not in the same market. In Aérospatsale−Alensa/de Havslland, jet aircraft and turbo-propeller aircraft were put in different markets
However, using price di$erences to define the relevant market is unsound, because what we are interested in, is the extent to which a product exerts a competitive constraint on the other , but price di$erences do not give us any information on this point.
Physical characteristics of products and their use, might give some indication as to the degree of substitutability between products, but only insofar as this information is used in the framework of the hypothetical monopolist test. The fact that both mineral waters and soft drinks are consumed with the purpose of ąuenching one’s thirst does not necessarily imply that these products should be included in the same relevant market…. Conversely, the fact that two products differ, does not mean that they are not in the same market: trains and buses are different products, but provide a similar service,so they could be in the same market.
Consumer surveys and market research help us understand consumers’ preferences and their degree of substitution.
Bananas are available throughout the year, whereas oranges in winter…thus, bananas might belong to the same market as oranges in winter months, but are in a separate market for the rest of the year.
After-markets (or secondary markets)
how to define markets when there exist primary and secondary products (also called after−markets), such as cars (primary product) and spare parts (secondary product)?
If the car-maker also produces headlights, defining the relevant product market as headlights for a particular brand of cars, might result in a dominant position of the car-maker in the secondary market, even if the car-maker has a weak position in the primary market.
in the SSNIP test, the relevant ąuestion is whether a hypothetical monopolist selling spare parts for a certain of car brand, would be able to profitably increase prices in a significant way.
consumers who are considering whether to buy that particular brand of car, might turn to other car-makers instead, to the extent that they base their purchase decision on the overall estimated life-time cost of the car, which includes the price of the car and the expected cost of replacing spare parts (or after-sales services, and so on). If the spare parts are costly (wrt the cost of the car), and many buyers will take it into account, the hypothetical monopolist will not raise prices in a small but significant manner, and the market should be defined as the market for cars and spare parts together.
whether secondary products are a separate market, depend on:
1- whether the price of the secondary product at issue is a considerable proportion or not of the price of the primary product: ash-trays will more likely to be put into a separate market than car engines.
2-the probability of replacement: a spare-part known as very likely to break down, will be in the same market
3-final consumers are less sophisticated, [less informed about the probability that spare parts or after-sales services are needed, or their prices]. thus, the definition of the product market is narrower , than for sophisticated consumers (eg firms).
Kodak case: tying the sales of spare parts for its photocopiers with assistance services. the US Supreme Court defined the market in a narrow way, as the secondary market for spare parts and services of Kodak photocopiers. Using this definition, Kodak was found to have almost 100% of the market for spare parts of Kodak photocopiers and 80-90% of the market for services and assistance of Kodak photocopiers. thus, it had market power, despite the fact that Kodak had market shares of only 10% in the primary markets……This judgment is debatable, because Kodak could not really exercise market power in the secondary markets, given the strong competition in the primary markets.
in the case, Kyocera, a producer of printers had been accused of adp in the market for sec- ondary products of its printers. However, the EC rejected the complaint since it found that consumers took into account the prices of the secondary products (that accounted for an important part of the cost of the life-time purchase of a printer) when buying the primary product (computer), and that there was significant competition in the market for printers.
Geograpkic market definition
Most of the considerations I have made above with respect to the definition of product markets hold good when considering how to define geographic markets. In particular, the SSNIP test is also the test.
Suppose for instance that a merger between mineral water producers in Italy is being considered. The SSNIP test: would a hypothetical monopoly seller of all Italian mineral waters, find it profitable to increase the price of mineral water by 5-10%? If the answer is affirmative, then the geographic market will be defined as Italy. If not, for instance because imports from France can render such a price rise unprofitable, then the test should be repeated on a hypothetical monopolist of Italian and French mineral waters, and so on.
When implementing the test in order to define a geographic market, in addition to elasticities and correlation tests, imports and transportation costs might also be used.
Otker ckaracteristics
In some cases, especially when the ąuestion is whether to define a market at a national level, or supranational, consumer preferences might be an important variable. For a number of products, preferences follow national borders. This implies that separate markets should be defined. Different national tastes might be different perceived ąualities, and in turn different market prices across countries. Yet, this does not necessarily mean that imports do not exercise a competitive constraint: a price increase could trigger a demand towards foreign products. however, if taste differences are too strong, it would make little sense to define markets across countries: Italians would not buy pasta unless made of durum wheat, whereas French and Germans would buy it without problems.
An example of markets that are (at the moment) unlikely to be defined at the supra-national level are media (publishing and broadcasting) markets. A merger between two French newspapers will probably result in a geographic market definition not wider than France, in part due to language, in part because it is unlikely that French citizens are interested in the Swiss and Belgian news
The assessment of market power (map)
Market power is the ability of a firm to raise prices above its marginal cost
but… in the real world, every firm has some degree of market power.
Traditional approach: (indirect) assessment of market power
The typical procedure followed by antitrust authorities all over the world is to first define the relevant market and then assess market power in that market, by measuring the market shares held by the firm/s….However, a firm’s high market share is not sufficient to conclude that it is dominant.
there is a positive relationship between market share and market power.
if the market share of a firm is below a certain threshold (say, 40%) there might be a presumption that the firm does not hold enough market power to be dominant, and the case might be dismissed (or the burden of prove of dominance falls entirely on the cma/ec); if it was above another threshold (say, 50%) there might be a presumption that the firm is dominant, and the burden of proving that dominance does not exist should fall on the defendant;
The ”Assessment of Market Power“ Guidelines (point 2.11) released by the UK Office of Fair Trading indicate two thresholds : below 40% it is unlikely that a firm is considered dominant; above 50% dominance can be presumed.
Once a market has been defined, the market shares of each firm in the market, can be calculated.
other factors:
-when one of the market participants is very unlikely to be a relevant market player in the near future, considering the current (or past) market share, would over-estimate the competitive constraints that this firm exercises on its competitors. It might then be appropriate to exclude its current sales from the calculations of market shares.
-If the existing capacity is just enough to satisfy current demand, their supply elasticity (that is, their ability to react to an increase in prices and serve new customers) is very low. If, on the other hand, they have excess of capacity, then the market power is reduced. Thus, the share of the capacity of each firm over total industry capacity, is relevant
-If a firm’s market share is consistently above, say, 50%, over five to ten years, that might indicate dominance. Conversely, a distribution of market shares among the main players that varies considerably over a short time, indicates no firm is dominant.
-the aggregate level of market power (the extent to which firms can raise prices above their marginal costs) increases with the degree of concentration…..this is very important when mergers are analysed . Indeed, measures of industrial concentration are used as a first device to screen anticomp mergers