Indirect methods to estimate MAP
the DP.plc DOCAS (ex. on gws output/price) can pot influence market outcomes/conditions]? [Conduct. ex. price discrimination, cannot in itself demonstrate map]; IS the map (pot) durable ? ; HIGH MAS* ? barriers2entry/expansion? bup ?, whats the market structure?, what is the nature of competition in that market? etc….. SLC requires, at least, entry barriers….but the existence of entry.barriers does not prove SLC (ex: ec/cma might conclude ,incorrectly, that entry barriers are low, when entry appears possible but in fact would not constrain map. Conversely, there is a risk that IF high MAS found, entry barriers could be (falsely) assumed
*MAS depend on the ability to define a relevant market ….but… Where market boundaries (MAD) are difficult to draw, MAS data becomes arbitrary >> Even with accurate market definition, high MAS are not necessarily proof of smap…..Another reason for caution over market shares is the MAD (defined relevant market) difficulty, where prices are not at competitive levels [EX. in markets where an undertaking has smap. If prices are significantly above competitive levels, the SSNIP test will indicate too wide a market. If prices are below competitive levels the test, may also provide an inappropriate mad (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 CELLOPHANE fallacy. This is particularly problematic with differentiated(segm) products
Any presumed correlation between high MAS, and map, must 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
MAS 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.
common error: to invest much effort/time on mad.mas estimations……INSTEAD, TO ASSESS THE LEVEL OF MAP I MUST FOCUS ON :
–market dynamics: becos smap is RELATIVE to any mutual cocons between the DP.plc, and its rivals actual/potential rivals, and any countervailing BUP
-consistency (precedents, rds, comparison of cma decis…)
– Low entry.exp 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
Direct methods (ECONOMETRICS) to estimate MAP
monopoly power (= smap) = the ability of a profit maximizing firm, to price above long-run marginal cost, rather than short run marginal cost.
direct methods are harder (co.acc’s profitability….) and less convincing.
Ex: estimate a firm’s demand elasticity= % change in quantity demanded (for a particular product), in response to a 1% 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….. In economic theory, a firm is said to exercise MAP 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 MAP would not be not flat, but negatively sloped. The slope of the demand curve, is the firm’s MAP….BUT…In practice, almost all firms have some degree of MAP and are able to raise price above short-run marginal cost. Moreover, a firm may have MAP for a variety of benign reasons. For example, in industries characterized by scale economies [where even efficient companies would be unprofitable if they did not exercise MAP and price above short-run marginal cost]
UK
Article 82 of the EC Treaty (Article 82) prohibits ‘any ADP, as incompatible with the common market if has pot to 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
Article 81 (and Chapter I of the UK Competition Act) …(and not Article 82)…. should be used for enforcement action against ADP by so-called collectively dominant undertakings
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- 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- 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
CIRCUMSTANCIAL EVIDENCE
1. Circumstantial evidence is employed in cartel cases in all countries…Cartel operators conceal and usually do not co-operate, unless they agree a leniency thus, circumstantial evidence is important…but there are limits to the use of circumstantial evidence. economic evidence, can be ambiguous. It must be interpreted correctly
2. The better practice is to use circumstantial evidence holistically, giving its cumulative effect, rather than on an item-by-item basis.
One delegate described the methodology for evaluating circumstantial evidence as like an impressionist painting, comprising many dots or brush strokes which together form an image. Another likened the process to a jig-saw puzzle.
requiring, instead of holistically, that each item of evidence be linked directly to a specific ua, is why the cases failed.
no case can be based solely on circumstantial evidence
3. “facilitating practices” , such as information exchanges, may facilitate an underlying cartel agreement. Evidence of them is circumstantial evidence of a cartel agreement, but it is not sufficient by itself to prove such an agreement.
4. two types of circumstantial evidence:
a.communication evidence: is the most important. evidence that cartel operators met, or otherwise communicated, but
does not describe the substance of their communications. It includes, for example, records of telephone conversations among suspected cartel participants, of their travel to a common destination and notes or records of meetings in which they participated.
b. economic evidence: Economic evidence is almost always ambiguous. Economic evidence can be categorized as either :
c. conduct ec.evidence: conduct evidence is the most important. includes evidence of parallel conduct by suspected cartel members, ex simultaneous and identical price increases or suspicious bidding patterns in public tenders. It can also include evidence of facilitating practices, though that conduct could also be characterised as “quasi-communication evidence.” exs: firm conduct, market structure, and evidence of facilitating practices….. would the conduct have been in the self interest of the actors, if they had not been acting jointly?…. The cma should assess the holistic, cumulative effect of all circum. evidence, rather than require that each item unequivocally support the hypothesis of agreement.
d. structural ec. evidence: includes evidence of high market concentration and homogeneous products.
6. National treatment of cartels, such as whether they are prosecuted as crimes or as administrative violations, can affect the burden of proof … In most countries, cartels (and other violations of the competition law) are prosecuted administratively. The principle administrative sanctions applied to this conduct are fines…In a minority of countries, but a growing one, cartels are prosecuted criminally. the burden of proof facing the competition agency is higher in a criminal case…So direct evidence is crucial.
7. in developing countries, it is more difficult for the competition agency to find direct evidence, so will have to rely more on circumstantial evidence…..but, direct evidence is plentiful in developing countries, due to the relatively high incidence of “naïve cartels” – cartels in which their members do not attempt to conceal their activity, either because they are unaware that their conduct is unlawful or because they are not sufficiently sophisticated to do so.
clpliability can be imposed only if it can be shown that the parties reached some “conscious commitment to a common scheme.”
the law makes no distinction between direct and circumstantial evidence, but simply requires that, before convicting a defendant, the jury must be satisfied of the defendant’s guilt beyond a reasonable doubt from all of the evidence
The above quotations, taken from the jury instructions in the recent successful criminal prosecution of the Chairman of the Sotheby’s auction house, illustrates that cartel conspirators can be prosecuted, even against the highest standards of proof, without direct evidence of the agreement or of their involvement in it.
what amount and quality of circumstantial evidence is sufficient to win without dir.evidence?
circum.evidence egs. “arrangements,” “combinations” or “concerted practices.”
circum.evidence types:
a. evidence of communications between rivals
b. economic evidence : firm conduct, market structure, and evidence of facilitating practices
a. evidence of communications between rivals
oligopoly does not inevitably lead to cooperation and collective action to increase prices. As a result, is crucial to diff :
a. firm conduct in unilateral self-interest, absent an agreement to act jointly….this type of Conduct is not good (circumstancial) evidence
b. firm conduct in the collective interest of all competitors.
• evidence of parallel conduct alone, such as simultaneous price increases by rivals, is not sufficient proof of a cartel agreement. There must be additional evidence to prove the existence of an unlawful agreement . Courts refer to this additional evidence as “plus factors.”…An important type of plus factor is evidence showing that there were communications among the suspected cartel operators, in the course of which they could have reached agreement
EU: DP and Monopoly Power(mop)
-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 EC 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.exp.barriers are a smap requirement. thus, they are the most important factor to identify smap, because, without the ability to exclude entrants, a firm will not be able to maintain smap
EC.cartels
Article 81.1 of the EC Treaty ”prohibits agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market.” >> uas need not be formal….uas can be reached through informal means of communication, including conversations at an association meeting; public statements by senior officers; price announcements or advertisements; or communications through customers. One US court famously noted: “A knowing wink can mean more than words.”…… but firms must have consciously acted , dir or indir, together…a “meeting of the minds” toward a common goal
More in particular the direct or indirect fixing of purchase or selling prices or any other trading conditions, the limitation and control of production, markets, technical development, or investment and the allocation of markets or sources of supply are prohibited.
regulations give the Commission the power, for instance, to carry out unannounced inspections at undertakings or associations of undertakings in order to obtain evidence and, in case a cartel has been detected, to impose fines of up to 10 % of annual (group) turnover on undertakings involved in anticompetitive activities
In EC, an agreement exists when the parties adhere to a common plan which limits, or is likely to limit, their individual commercial conduct, by determining the lines of their mutual action or abstention from action in the market. It does not have to be made in writing, no formalities are necessary, and no contractual sanctions or enforcement measures are required. it is not necessary, to have agreed in advance
ecj: for there to be an agreement within the meaning of Article [81(1) EC] of the Treaty it is sufficient for the undertakings to have expressed their joint intention to behave on the market in a certain way”….. An agreement for the purposes of Article 81(1) EC does not require the same certainty as would be necessary for the enforcement of a commercial contract at civil law
Cartel proceedings conducted by the European Commission are directed at undertakings, not individuals…Also the sanctions imposed by the Commission are administrative in nature. There are no criminal sanctions in EC competition law.
However the administrative character does not significantly lower the standard of proof which lies upon the Commission in comparison to criminal proceedings. any doubt in the Commission’s evidence to prove an infringement of competition rules has to be construed in favour of the suspected undertaking . factors cited by the CFI to evaluate the probative value of statements:
• whether the answers had been given on behalf of a company or in an individual capacity;
• was the author under a professional obligation to act in the interest of the company:
• was the author a direct witness speaking from personal knowledge of the facts;
• were the statements made deliberately and after mature reflection;
• did the individual supplement and confirm the statement at a later stage in the investigation;
• was the statement against the own interest of the individual or against the interest of the
employing company
EC often finds evidence on the precise rates of prices increases implemented by the companies suspected having participating in a cartel. Parallelism of behaviour for instance in price increases is only an indication and does not in itself constitute evidence of collusion and It will be necessary, therefore, to uncover other elements of proof
egs of typpical indirect evidence: travel orders, travel expenses or diary entries (which can be used to confirm the attendance at a meeting), e-mail or telephone records (demonstrating the fact of contacts without showing the concrete context), meeting invitations, and the constitution of a trade association or economic evidence