COCOO STEPS
WATCHLIST RESEARCH TOOLS CL CASES AND TOOLS SHORTSELLING ENVIRONMENT PB PI MALPRACTICE
all gov publications
-ECONOMETRICS [statistics capable of empirically evidencing economic relationships.]
<>
CL CONTROLS + (POLICIES=SOSBIS)
<> MERGER CONTROL. <> .MERGER PROHIBITION (TOBII V CMA).
<> THREAT TO COMPLAIN TO CMA, FOR FAILURE TO NOTIFY CMA OF A RELEVANT MERGER SITUATION. ….EG. ‘I FOUND AN SLC’ (SLC TEST)
-FLOWCHART + CLIENTEARTH CASE.
– MARKET POWER (MAP: is inv.prop. to consumers’ ability to switch) <> BUYER POWER (BUP)
-IS THERE A CMA DECISION , ON PI GROUNDS, [SEE .PI GROUNDS SAMPLES TAB.] INCONSISTENT WITH UK/EU’S INTERNATIONAL OBLIGATIONS, (EG PARIS AGREEMENT; CLIMATE CHANGE ACT) ?… IF SO, TO THE EXTENT THAT ART. 2 OR 8 ARE ENGAGED, I CAN CHALLENGE THE DECISION UNDER HRA98, (CASE: MILLER V PRIMER MINSTER 2019) <> .SUSTAINABILITY POST
-BEST . CMA PROMPTING EGS:
-ADP: LOTS OF PROPER COMPETITIVE BEHAVIOUR, BECOMES IMPROPER(adp) WHEN A CO BECOMES DOMINANT… cocoo TARGETs only DOMINANT COS
-MFC AGREEMENTS: (MOST FAVOURED CUSTOMER/MOST FAVOURED NATION)…cocoo TARGETs EVEN NATIONS!
-ILLEGAL MERGERS (PROPOSED OR COMPLETED OR DE FACTO)
-LEGAL MERGERS (PROPOSED OR COMPLETED OR DE FACTO) WHICH REDUCES BOTH CONSUMER CHOICE AND RIVALRY
-COS WITH SIG BUP, BUT INSIG MAP, WHO FAIL TO PASS COMPENSATORY BENEFITS TO THE CONSUMERS
FOC OR ADVICE BOTH PARTIES, ON COURT DECISIONS eg. CAT (WITH PLFs BINDING AND/OR NON BINDING)…. CONTACT THE WINNING PARTY TO SELL MY DUEDILIGENCE (dd) PROPOSED, REMEDIES ETC (IMPLIED THREAT) AND/OR CONTACT LOSING PARTY, TO SELL THEM MY dd, ON HOW TO WIN AN APPEAL
IDENTIFY PROPOSED MAs UNDER CMA INVESTIGATION; AND MAs COMPLETED THAT ARE NOT UNDER INVESTIGATION. WHERE THEY VOLUNTARILY NOTIFIED?
NSI ACT PUBLICATIONS EU INFO SOURCES FOIA . eg CMA EXPERTS
These are publications of CMA final orders, on PI grounds BASED ON THE NSI ACT : THE PI STEPS. : 17 areas = mandatory notification=nsi act) . THE REST ARE ON CL grounds (voluntary notifications)
-OTHER SOURCES OF INFO:
-competitionlawexpert.co.uk; probono solicitors; -published legal opinions; -press releases; -speeches; -decisions; -strategic steers; -recommendations; – NAO; -TRADE ASSOCIATIONS (incredibly, the communications between cos, made through trade associations, are legal !): look for trade associations decisions/agreements, as they are possible undertakings (subject to CL) ; -statements of objection (SOs); -Settlement decisions by CMA/CTA/etc : they are less detailed (than court decisions) but can also be very useful to identify possible FOCS and also settlement flaws that Padi can FOC. ; -For PIEEACs: indetify recent failures to tender RJ decisions; also in Financial Ombudsman Service complaints (to find what’s going wrong) < > EC/CFI(GC)/ECJ…..CAT/CMA decisions; -Bloomberg; -EC/CFI(GC)/ECJ…..CAT/CMA RJ JUDGMENTS; -Press Releases; -decisions
GC+ECJ press office + cases BLOOMBERG PRESS RELEASES CMA CASES CMA MEDIA ENQUIRIES CAT CASES AND LIVESTREAMS
CA CASES AND LIVESTREAMS SUPREME COURT LIVESTREAMS. MINISTRY OF JUSTICE PRESS OFFICE EC CASES
EC PRESS CONTACTS ARTICLES HOW TO FIND STORIES
SOS: read publications of the INs
(INTERVENTION NOTICES, to investigate and make a decision, on a PI ground ONLY (17 AREAS=mandatory notification=nsi act)
see publications of the co’s SOIs(statements of interest) or Undertakings (concesions, commitments, compromises) ?
<> cma review of undertakings
cma has a duty to inform sos , if any firm’s undertakings need to be released, varied, or enforced….cocoo will argue cma’s breach of this duty [re. bae, etc]
TOP TOP DISCLOSURE TABLE TOP SOIs + TOP RECOMs
*TOP has no power to enforce the SOIs… see the TOP consultation document of 2017
-did cos. fail to comply, after the MA, with the undertakings and SOIs? possible fines, and undoing the merger (at huge loss to company)
– Any undertakings that TOP fail to imposed?
USE COCOO’S TOOLS on existing MAs: LATEST M&A
-are there MAs that failed a mandatory notification?, if so, the MA is VOID….I WILL ARGUE THAT MA SHOULD HAVE BEEN NOTIFIED, OR, IF NOTIFIED, I WILL ARGUE THAT IT CONTAINED FALSE/MISLEADING INFO.
eg. the proposed MA falls under UK (CMA/SOS) jurisdiction?
eg. are companies undervaluing their annual t.o. (to be below the £1m min.threshold for CMA investigation?)… if so, SOS should still issue I.N. (in PI, if is within the 17 areas)
eg. the target company is targetted precisely because is a newy (that has not yet reached the £1m t.o.) so the MA will not be investigated?….. if so, SOS should still issue I.N. (in PI, if is within the 17 areas)
-MAs should have been blocked, or cleared?,
-is the uk government (SOS) encouraging mergers between national cos, to make a National Champion (NC), using national PI grounds: so that it can compete effectively with china etc?:
PADI will PAP this SOS decision, because national champions are usually NMs(near monopolies)…. also, who should be a nc should be decided on economic strategy grounds, and not by lobbyists (the sad reality). even the CMA resist nc. ncs should not be created on national PI grounds, because it should only be competitive markets that produce ncs. . Also, if every country supports (using taxpayers cash) their national champions, their relative positions will not change, but taxpayers all over the world will be worse off. CASE: siemens/alstrom railways. EC banned the proposed MA, despite merkel and macron arguing in favour of the MA as they wrongly (type II error) argued that EU needs a nc.
Every gov. policy has 2 risks:
1/type I error: suppressing the birth of a nc, when it should be allowed. this error is very unlikely, because is unlikely that a nation needs a champion.
2/ type II error: supporting a national champion, when is not necessary. this error is more common and serious, becos it creates a national NM.
To answer above questions, cocoo will do these tests:
-TOT (turnover test)=£1m annual t.o. min, to be called-in by CMA for investigation.
-[market share test = SOST (share of supply test: min.25% of supply of goods/services in UK, prior to MA )]
-HMT(hypothetical monopoly test] = SSNIP test : is a test to define [market boundaries = market definition]. it asks: WOULD THE MA ALLOW THEM TO INCREASE PRICE BY 10% SUSTAINABLY?….if so, the MA should be blocked……The SSNIP test allows for loose application: egs:
-the price increase is not over prevailing prices, because they already most likely reflect the NM(near monopoly) power. Thus, it should be over the prices that would prevail if the market was competitive.
-in intermediate goods markets (where there are retail and wholesale transactions) : what’s the extent of passthrough? (the extent which retailers pass the 10% pricerise to consumers.),… and, whats the extent of consumer reaction to the passthrough?
-the cellophane phallacy: when monopoly prices prevail, there will appear to be many product substitutes (to the NM products)… BUT, they could be in separate markets. …usa case Dupont: dupont argued that cellophane was not a separate market because there was a high elasticity of demand between cellophane and alluminium foil. But court held that they were separate markets thus cellophane was not a NM, because it only had a small share of the ‘wrappings market’.
-is not always 10%…it will depend on the market, inflation, past prices, etc. less that 10% implies that demand is more elastic. and viceversa.
-the priceincrease needs to be ‘non-transitory’. most accept that should be min.1 year, but this depends on the market, inflation, past prices, etc.
-what factors det. competitiveness?:
a.intramarket rivalry: can competitors can act collectively, as a single NM, to constrain prices of the merged company.? if so, the merged co. has low market power.
b.extent of buyer/supplier power: do buyers have good alternatives to the 10% priceincrease? ; can they negotiate down the price?;
c. rivals dont need to be in a market to affect competition. the mere threat of entry can affect competition.
-NMs are more likely to introduce innovations (R&D) (to protect their NM). notice that innovation is in a different market to the products.
CHRONO INVESTIGATION STEPS
1-cocoo will specialise in bringing/pap nonclass wpi focs: why?
cocoo does not need to find victims, as litigates on own standi, on wpi of citizens/consumers….since, these are different than the rjparties, the foc is not rj….but cocoo needs to find members (harmed ), unless is a EEAC cocoo does not need to prove the (infringement) rjdecision [becos is a foc]
2- smap ??. If no smap, end. IF SMAP, ANTICOMPS?
Persistent high profits may signal anticompetition… but before reaching this conclusion we must ask: why are profits high?; will they keep high in the future?
IDENTIFY PIFOC (PUBLIC INTEREST FOC) TYPE
A/ NON-EEAC PIFOC
B/ EEAC PIFOC <> the 17 areas of the NSI Act
public body fails to tender a public contract…[is eeac becos no person has more right to sue than any other, since no person ever tendered.]..environment public body (or private firms providing public services) engaging in anticomps CMA making flawed decisions
regulators making flawed regulation
WHO TO FOC V …? = IDENTIFY FOC DEFENDANT
MARKET DEFINITION. MARKET SHARE ANCHOR DEFENDANTS
V. CO/DIRS, ON PI GROUNDS, FOR ALLOWING THE GROWTH OF THE CO’S ‘COMMON OWNERSHIP’ TO HARM COMPETITION……. OR V FINANCIAL COS, ON PI GROUNDS, FOR BEING TO BIG TO BE ALLOWED TO FAIL
PB <> CL POLICIES, REGULATION & SUPPLEMENTATION <> CMA AND CL POLICIES
RESEARCH PBs AND SEEK REMEDIES:
Threaten cos to complain to cma/sos ? or challenge via . JR SEE JR TAB]. + IN MERGER CONTROL TAB + JR IN CL TAB
-Read government strategies and plans: are they inadequate?. High Court litigation is available, for instance to request a redraft.
-Public recruitment with no advertising or fair process?
-Non-tendered contracts?. No contract award notices?. Connections? Conflicts of interest? . Research the awarded company: do they have enough resources and experience? do their websites engage in data analysis and targeting of competitors or political adversaries? (contact AWO data breach agency). Who’s behind these breaches of data protection? why did they do it? Who is funding them?
-Research leaked documents
A local authority may be convicted of a civil or a criminal offence…Also, for a
breach of statutory duty claim v a local authority, a claimant has to establish:
Parliament imposed a statutory duty for a limited class of the public
Breach of the duty should give rise to a private law action for damages
A common law action for damages is difficult for breach of statutory duty although a civil remedy may still be possible. Cases: X (Minors) v Bedfordshire County Council……Phelps v Hillingdon London Borough Council
-cma/sos decision (or failure to decide)?:
ex: should SOS have (or not) issued a (or such a) PII? <> SEE PDF PII NOTICE AND CMA REPORT
V GOV OR REGULATORS <> REGULATORS FAILURESWHY REG.COS EXHIBIT WEAK INTEREST COVER RATIOS:
exs: See full details in PDFs :
-has the regulator estimated the cost of capital properly?…are the reg.cos complying?
-has the regulator calculated price controls properly?… are the reg.cos complying?
–has the regulator calculated co. incentives (for co. to improve its efficiencies) properly?… are the reg.cos complying?
-Threaten a reg.co to complaint to its regulator / or threaten a non.reg.company with a duty to be regulated:
a. companies in the airports and telecom sectors: i can threaten to ask regulator to make a market power determination, if i think the co should be regulated (or should not).
b. companies in all other sectors: i can allege that the co needs to be (or not be) regulated, which would have to be via: appointment; designation; or licence (eg. solicitors LPC)
PADI PRODUCES A POSITION PAPER/ DUE DILIGENGE REPORT/PROPOSED REMEDIES ETC AND THEN TRIES TO BE RESTITUTED BY THE COMPANIES
NDA REMEDIES TAB
FOC GROUNDS AND WHERE TO FOC
-BEST Grounds: contempt, public interest.; assisting crime/fraud; co-conspiracy; complicity…..
-EC: ‘THE SUSTAINABILITY(PI) QUALITIES OF A PRODUCT ARE INDEED A COMPETITION PARAMETER (CL)’ < > OECD: AN UA IS BOTH PI + CL, IF PRODUCES DIRECT ECONOMIC BENEFITS (WHETHER ON JUST THE COMPANY, OR ON THE WORLD), (EG. ENVIRONMENTAL BENEFITS),
-BANANAS, CHOCS, COFFEE : THE INTERMEDIARIES/WHOLESALERS/RETAILERS , PAY TOO LOW UNFAIR PRICES TO FARMERS (SOUTHAMERICA…) + ENCOURAGE EXCESSIVE USE OF SCARCE RESOURCES + DISCOURAGES SUSTAINABLE LAND PRACTICES. (102.A TFEU)
– HOW SH PRIMACY; COMMON OWNERSHIP; CONCENTRATION OF ASSET MANAGEMENT, AFFECT CL/PI ? <> FINANCIALISATION POST
-DID THE COMPANY IDENTIFY (OR AT LEAST TRIED TO) OPPORTUNITIES TO WORK TOGETHER FOR SUSTAINABILITY ?…. DID THEY ENGAGE IN SUSTAINABILITY?…. THEY CAN LAWFULLY ENGAGE IN ANTICOMPETITION, AND EVEN RAISE PRICES, AS LONG AS IT IS WITHIN A SUSTAINABILITY (STANDARISATION – NOT REQUIRED, BUT RECOMMENDED) AGREEMENT….
< >COCOO WILL ASK FOR DISCOVERY OF THE SUSTAINABILITY/STANDARISATION AGREEMENT….TO SEE IF BREACHED
-CAP REP BREACH?
-FAILURE TO FOCUS ON THE CONSTITUTIONAL PROHIBITIONS OF THE EU TREATIES?….PROPORTIONALITY PPLE. APPLIED?
-A CONFLICT BETWEEN PI(=SUSTAINABILITY) GROUNDS/POLICIES, CL(=ECONOMIC) GROUNDS/POLICIES. ?….IF THE BODY (PUBLIC OR PRIVATE) IS ENGAGED IN ECONOMIC ACTIVITIES, IS ACTING UNDER AN UA (THUS, SUBJECT TO CL)…. NOW, COCOO WILL ASK CMA TO DISCLOSE THE SFOs (SHORT FORM OPINIONS) ISSUED.
FOC GROUNDS: PI/GREY/CL
EU CONSTITUTION AND COURT JURISDICTION (WHERE TO FOC) PI GROUND (SUSTAINABILITY) MERGER CONTROL
ADP CARTELS
PADI PAPs LPC/CIP for possible:
a.private action (v company) , to void the MA, for failing to notify the MA, or failing the undertakings/SOIs;
b. for possible JR (judicial review) v decision (or omission to decide) by:
-SOS (only has jurisdiction on PI ground=17 areas) to decide to issue (or not) an I.N.(intervention notice), or decision (type II error) to support a national champion, when is not necessary. this error is more common and serious, becos it creates a national NM.
-TOP/CMA failure to implement undertakings/SOI etc…. and to follow them up
-CMA (has jurisdiction on both PI or competition grounds…thus, on any areas (of the economy) …. Most MAs are outside the 17 areas, thus notification is voluntary, and most are only reported after taking place!…. this is risky, because CMA could investigate and order the MA to be undone (the merged company must sell very quick a big chunk, usually at a huge loss.
eg: META/Giphy case)
[mop = SMAP] + ANTICOMPS = CL VIOLATION >> If there is no smap….there is no need to look at anticompetitive effects…THUS:
- STEP 1 <> cocoo’s first step is always to identify the possible existence of smap.
- STEP 2: WHEN A FIRM IS FOUND TO HAVE SMAP , CMA.EC MUST NOW find that the firm’s conduct has anti-competitive effects.
STEP 1
single firm conduct provisions should be applied only to firms that have “substantial market power SMAP”: when competitive constraints imposed by other firms are relatively ineffective on the dominant firm. In this situation, the dominant firm’s decision about its own output and price can influence market outcomes.
is map durable? [can be maintained for a considerable period of time]
Competition authorities and courts rely primarily on indirect evidence to determine whether a firm has smap, such as market shares, barriers to entry and expansion, buyer power and the nature of competition in the market. there is no single factor that will
provide conclusive answers.
Entry barriers and barriers to expansion are the most important factors in determining whether a company’s ability to exercise smap, is effectively constrained. If other firms can enter or rivals can expand, a firm will not be able to
maintain smap. Barriers to entry and expansion are thus a necessary, but not sufficient for conclusive evidence of smap, because markets can be competitive even if entry barriers are high.
The assessment of entry barriers requires a thorough analysis of the likelihood, extent and timeliness of entry or expansion that can constrain the exercise of market power. A decisionmaker might conclude ,incorrectly, that entry barriers are low, for example, when
entry appears possible but in fact would not constrain map. Conversely, there is a risk that once high market shares have been found, the existence of entry barriers is assumed without sufficient factual inquiry.
There are indirect smap evidence-types, to draw conclusions from : structural market; buyer power;
Market share data continue to be the “high priest” in assessing whether a firm has smap. market share data depend on the ability to define a relevant market ….but… Where market boundaries are difficult to draw, market share (concentration) data are close
to arbitrary.
Even with accurate market definition, high market shares are not necessarily proof of smap. Any presumed correlation between high shares and market power will depend on:
a.how competitors or customers can react when a firm restricts output,
b. the reasons why the firm maintained high market shares, and
c. whether there are any other conditions that limit the firm’s ability profitably to raise price.
These factors are indeed more relevant than market shares in establishing smap
Market shares can fail to correctly predict whether a firm has smap
Direct evidence of smap, such as a firm’s profitability, is not frequently used
in single firm conduct cases. Methods for directly measuring market power are very dataintensive; and even if the necessary data are available, they are typically subject to different interpretations and therefore will not conclusively establish smap.
One econometric method to directly measure a firm’s market power is to estimate a firm’s
demand elasticity. Elasticity of demand is the percentage change in quantity demanded for a
particular product in response to a one percent change in price. Estimating a firm’s demand
elasticity with respect to a product, measures how customers will react to a price
change and to what extent the firm’s sales are sensitive to changes in rivals’ sales. A firm will
face inelastic demand if competitors cannot react “effectively” by increasing their output in response to a firm’s increase in price or decrease in output. Thus, low firm’s price elasticity suggests greater market power. … but this method requires to gather large amounts of data
if high profits have been persistent and are consistent with other evidence, they
could be a smap indicator.
Conduct of a firm can also be considered as evidence in the analysis of substantial market power. However, conduct in itself cannot be smap evidence
the fact that a firm conduct engages, eg in price discrimination, cannot in itself demonstrate that the firm has smap
Competition authorities and courts should also be willing to consider conduct of a firm as
relevant evidence that a firm lacks market power. For example, bidding wars for customers where smaller competitors win new customers or the alleged monopolist/dominant firm is forced to lower its prices in response to market entry are inconsistent with smap
STEP 2
WHEN A FIRM IS FOUND TO HAVE SMAP , CMA.EC MUST NOW find
that the firm’s conduct has anti-competitive effects.
In economic theory, a firm is said to exercise market power when it prices above its short-run
marginal costs. Unlike the demand curve faced by a firm in a perfectly competitive market, the demand curve faced by a firm with market power would not be not flat, but negatively sloped. The slope of the demand curve, is the firm’s market power.
In practice, almost all firms have some degree of market power and are able to raise
price above short-run marginal cost. Moreover, a firm may have market power for a variety of benign reasons. For example, in industries characterized by scale economies, even efficient companies would be unprofitable if they did not exercise market power and price above short-run marginal cost. Some degree of market power therefore is the norm and is compatible with competitive markets
map is harmful only if it can become smap [durable map] = a firm that could, durably, raise/maintain price above competitive level and exclude competitors (or other barriers)
monopoly power (= smap) = the ability of a profit maximizing firm, to price above long-run marginal cost, rather than short run marginal cost.
Dominance and Monopoly Power: Tests:
EC.clp
Article 82 of the EC Treaty refers to an “abuse by one or more undertakings of a dominant position within the Common market or a substantial part of it…”
ecj: “dominance” is the ability of a firm to act [independently = smap] from competitors, customers and ultimately of its consumers
ec: microsoft case: held: Microsoft acted [independently = smap] from its competitors, emphasizing that despite the emergence of competing OS programs, Microsoft’s financial performance was not affected, Microsoft did not alter its pricing policy and business model, and remained successful. The Commission also found that Microsoft was
independent of customers, because MS Windows was a must carry product for PC
manufacturers. It also noted that Microsoft was independent from end-consumers, emphasizing several statements that highlighted the high switching costs faced by customers which prevented them from using competing operating software.
Super-dominance: Along the same lines, in Microsoft the Commission referred to Microsoft as a firm with an “overwhelmingly dominant position.”= A NEAR MONOPOLY = carries a proportionally higher responsibililty on the firm, to avoid anticomps.
Entry barriers are a smap requirement. thus, entrybarriers are the most important factor to identify smap, because, without the ability to exclude entrants, a firm will not be able to maintain smap.
UK
definition of “dominance”. Article 82 of the EC Treaty (Article 82) prohibits ‘any abuse of a dominant position’ as incompatible with the common market in so far as it may affect tradebetween Member States. However Article 82, and the Chapter II prohibition in the UK, does not define ‘dominance’. Similarly, market power is not defined in the uk Enterprise Act 2002….While the cma agrees that smap is a necessary condition for dominance, we are less clear that the ability to “substantially increase prices above the competitive level for a significant period of time” provides an ideal definition of smap. why?:
1- Firstly, there may be many oligopolistic markets in which prices lie above the competitive level, but in which no individual firm would be found dominant
2- Secondly, this definition does not capture any element of “ability to prevent effective competition”. This would seem to be an important element in the definition of dominance, especially where the alleged abuse is exclusionary.
Weight to place on market shares in assessing smap:
it is easy for too much energy to be spent on market definition and calculation
of market shares, and too little time and effort on other more important factors such as barriers to entry and expansion and market dynamics. Whether or not an undertaking has smap, depend upon the constraints upon it from its existing competitors, potential competitors and countervailing buyer power.
market shares are only used as a filter at a preliminary stage of a case – that is, they give no presumption of dominance. A low market share generally indicates a low likelihood of consumer harm.
Other relevant factors in assessing dominance include the following
• Low entry barriers – A firm (or group of firms) with a persistently high market share may not
necessarily have market power where there is a strong threat of potential competition. If entry
into the market is easy, the incumbent firm might be constrained to act competitively so as to
avoid attracting entry over time by potential competitors.
• Buyer power – If buyers have a strong negotiating position this will constrain the potential
market power of a seller. For example, a rival representing 5% of sales may be an effective
constraint if customers are able to sponsor its rapid expansion and have exercised this constraint in the past. Size alone is not sufficient for buyer power. Buyer power requires the buyer to have choice either by sponsoring entry or expansion or by switching between suppliers easily and readily.
• Bidding markets – Sometimes buyers choose their suppliers through procurement auctions ortenders. In these circumstances, even if there are only a few suppliers, competition might be
intense. This is more likely to be the case where suppliers are not subject to capacity constraints (so that all suppliers are likely to place competitive bids), and where suppliers are not differentiated (so that for any particular bid, all suppliers are equally placed to win the contract). In these types of markets, a firm might have a high market share at a single point in time and for the period of the contract, which may be several years. However, if competition at the bidding stage is effective, this currently high market share would not necessarily reflect market power.
• Successful innovation – In a market where firms compete to improve the quality of their
products, a persistently high market share might indicate persistently successful innovation and so would not necessarily mean that competition is not effective. An effective constraint on market power can come entirely from the threat of rival companies superseding the incumbent’s product. A persistently high share could also arise if one firm is significantly more efficient than its competitors.
• Product differentiation – Sometimes the relevant market will contain products that are
differentiated. In this case firms with relatively low market shares might have a degree of market power because other products in the market are not very close substitutes.
• Responsiveness of customers – Where customers are very price sensitive, substantial market
shares may not reflect a firm’s market power. In such cases a price increase may lead to
consumers switching to a close substitute, or choosing not to buy the product. In contrast, where switching costs are high, a firm may have market power over its ‘captive’ customer base even if its share of the market is relatively low.
• Price responsiveness of competitors – Sometimes a firm’s competitors will not be in a position to increase output in response to higher prices in the market. For example, suppose a firm operates in a market where all firms have limited capacity (e.g. are at, or close to, full capacity and so are unable to increase output substantially). In this case, the firm would be in a stronger position to increase prices above competitive levels than an otherwise identical firm with a similar market share operating in a market where its competitors are not close to full capacity.
• Profitability – An analysis of profitability in a market may provide an indication of limitations in the competitive process.10 A methodology that has been employed in the UK Market
investigations regime is to use Return on Capital Employed (ROCE) as the principal profitability measure. The ROCE is compared to the estimated cost of capital for a typical firm in the market being investigated. There is no threshold, over which profits might be said to be “substantially in excess of the cost of capital”, but the greater the excess profitability, the stronger may be the inference of limitations on the competitive process….Another reason for caution over market shares is the well recognised difficulty of market definition where prices are not at competitive levels. This is likely to be the position in markets where an undertaking has substantial market power. If prices are significantly above competitive levels, the Hypothetical Monopolist or SSNIP test will indicate too wide a market. If prices are below competitive levels the test may also provide an inappropriate market delineation (which may be too wide or too narrow). In addition, there is a tendency to conclude, erroneously, that all products within the defined relevant market are perfect substitutes while those outside offer zero substitutability or constraint on products in the market – the so-called zero-one fallacy. This may be particularly problematic with differentiated products