Contents
Page
Introduction
The Concept of Dominance
What is meant by a dominant position?
What is Market?
Why market is important in competition regulation?
Relevant Market
The Product Market
Relevant Geographic Market
Commission’s definition of the relevant geographic market:
The SSNIP Test
Determining the Dominance
Market share:
Barriers to entry:
Conclusion
Bibliography
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1
Introduction:
1- The aim of EU competition policy is based on two concepts: defining
market and assessing dominance. Article 81 and 82 are the main
competition provisions of the European Commission Treaty. Both
articles pursue a common general objective. Article 81 prohibits all
agreement between undertakings and concerns which may affect trade
between member states. The aim of article 82 is to deal with monopoly
and market power. It focuses on undertaking which hold dominant
position. In this essay, I will define the concept of dominance and then
I will assess article 82 which prohibits the abuse of dominant position.
The Concept of Dominance
2- The classic definition of dominance was expressed by European court of
justice in case United Brands V. Commission1: “A position of economic
strength enjoyed by an undertaking which enables it to prevent effective
competition being maintained in the relevant market by giving it the
power to behave to an appreciable extent independently of its
competitors, customers and ultimately of its consumers.”
3- The court in defining dominance, focused on the ability of a dominant
undertaking to act independently of its competitors, customers, and
consumers and to prevent effective competition.
What is meant by a dominant position?
4- A dominant position means that a supplier usually has a powerful
economic position making it possible for the undertaking to prevent
effective competition by acting independently of its competitors and
customers and ultimately of its consumers.2 The main indicator of
dominance is a large market share; other factors include economic
weakness of competitors, absence of latent competition and control of
resources and technology. In addition, we have to determine market
share, accordingly, we have to know the size of market.
1
Case 27/76, United Brands V. Commission , Paragraph 65.
Both supplier and Buyer can have market power (United Brands and BA/ Virgin), but usually refers to
supplier’s power. Seminar 7
2
2
5- The Commission and the Court have stated that in a dominant position an
undertaking act independently on the market. Following this definition,
United Brand3 and Hoffmann la Roche were assumed by the European
Court of Justice to be dominant supplier.
6- In fact, dominant position can be determined in relation to a market and
competition can be determined in relation to products and their
characteristics that makes them interchangeable or substitutable with
other products on a market. Hence, European Court of Justice in
Continental stated: “the definition of relevant market is of essential
significant.”4
What is Market?
7- There are different definitions for market. In the Harper Collins
Dictionary of Economics it is defined as: “Market is an exchange
mechanism that brings together sellers and buyers of a product, factor
or production or financial security”. It is further added that:
“Economists define a market as a group of products consumers view as
being substitutes for one another.” However, a market can also be
defined as the amount of total sales of a particular product.
8- Market definition is a necessary and fundamental starting point in
investigations about the abuse of market power. The definition of the
concept of market is different in economic terms and for competition
Purposes.
Why market is important in competition regulation?
9- The aim of competition policy is to ensure that markets work efficiently.
For instance, if two firms have equal market power, it can be said that
the market and competition are efficient. In other words, the way a
market works is by protecting competition. So, it is necessary to define
dominant position in the market. Furthermore, Competition policy
3
Case 27/76, United Brands Co and United Brand Continental BV V. Commission ECR 207, CMLR 429
Paragraph 65 “a position of economic strength enjoyed by an undertaking which enables it to prevent
effective competition being maintained in the relevant market by giving it the power to behave to an
appreciable extent independently of its competitors, customers and ultimately of consumers".
4
Case 6/72, Europemballage corp and continental Can Co Inc V Commission 1973 ECR 215 , Paragraph
42.
3
investigations also require that the limits of the relevant market be
determined carefully.
10- The EC Treaty does not say anything about definition of the market.
Therefore, the Commission defined the market, and besides, it noted
that definition of relevant market is needed. 5
11- The Commission defined the relevant market for the purpose of the
Community Competition Law as follows: “Market definition is a tool to
identify and define the boundaries of competition between firms. It
services to establish the framework within which competition policy is
applied by the commission. The main purpose of market definition is to
identify in a systematic way the competitive constraints that the
undertaking involves…”6
12- Defining the relevant market requires identifying the set of products that
compete with each other. In addition, the purpose of defining the
relevant market is to assess whether firms possess market power or
dominant position.
13- Market power or dominance is more likely to exist in situations where
firms have large market shares relative to their competitors and where
there is limited scope for entry into that market. Market shares and
potential market entry, however, can be determined only after the
relevant market has been defined.
Relevant Market
14- The purpose of defining a relevant market is to identify those products
and services that are close substitutes for one another and that they
operate as a competitive constraint on the behavior of suppliers of those
products and services. By defining the relevant market, the scope of
competition and abuse of dominant position are also determined.
Competition can be defined from buyer side that is said: “demand side”
or from seller side which is said: “supply side”. Commission defined
relevant market that combine the product market and the geographic
market.
5
6
Case 27/76, United Brands Co and United Brand Continental BV V. Commission ECR 207,
Published in the Official Journal: OJ C 372 on 9/12/1997
4
The Product Market
15- Economist define product market as a group of products that can be
substituted or interchanged by the consumer with regard to their
characteristics, prices, and intended use.
16- Accordingly, ECJ poited out the term of interchangeability. In the case
of Hoffmann-La Roche, it focused on this term. The Commission
stated: “A relevant market comprises all those products and/ or services
which are regarded as interchangeable or substitutable by the consumer,
by reason of the products characteristics, their prices and their intended
use.”7
17- Interchangeability means that a set of products are considered by
consumers to have similar characteristics. These characteristics may be
the price or their intended use. This means that from a consumer point
of view, a product substitutes another product if it can be used in the
same way. On the contrary, some products, even if they can be used in
the same way, because of their prices, they cannot be substituted with
other products.
18- Hence, interchangeability or substitutability is important from both the
demand and supply side.
19- The Commission in Articles 85 and 86 of the Treaty, in particular in
section 6 of Form A/B, has defined the relevant product market as
follows:
20- "A relevant product market comprises all those products and/or services
which are regarded as interchangeable or substitutable by the consumer,
by reason of the products' characteristics, their prices and their intended
use."8
21-In the United Brands case, the ECJ illustrated the concept of relevant
market that implied effective competition between the products in this
market. The US company argued that there was sufficient degree of
interchangeability between the product i.e. Banana and other fresh
fruit.
United Brands & Co Case9
7
http://europa.eu.int/scadplus/leg/en/lvb/l26073.htm Date: 03/01/2005
COMMISSION NOTICE on the definition of the relevant market for the purposes of Community
Competition law. Published in the Official Journal: OJ C 372 on 9/12/1997
8
9
Case: 27/76, United Brands & Co and United Brands Continental BV v. Commission
[1978] 1 CMLR 429
5
22- United Brands Co, is a US company which produces banana. The
Commission found United Brands abused its dominant position in the
banana market. They argued that banana were interchangeable with
other fresh fruits such as apples, oranges , grapes , peaches,
strawberries, etc. but Commission refused their argument and stated
that because of their physical shape and economic characteristic10 they
are not interchangeable. The Commission also relied on the Food and
Agriculture Organization Studies that found “low cross-elasticity”11
between banana and other fruits. In addition, the Court reasoned that,
banana formed a very important part of the diet of a certain section of
the society. 12
Relevant Geographic Market
23- The definition of the relevant geographic market used in the European
Antitrust Regulations, originates from the United Brands case (case
27/76, ECR 1978). It was stated: “The discrete territory within the
community in which the goods or services in question are offered and
in which the competitive conditions are sufficiently homogeneous to
permit estimation of the economic strength of an undertaking.”13
24- A geographic market is the area in which substitution occurs. Therefore,
undertakings can not increase the price in the area where consumers can
buy a substitute instead of buying from another area.
Commission’s definition of the relevant geographic market:
25- “A relevant geographic market comprises the area in which the firms
concerned are involved in the supply of products or services and in
which the conditions of competition are sufficiently homogeneous and
The Court of Justice stated: “The banana has certain characteristics appearance, taste,
softness, heedlessness, easy handling, a constant level of production which enables it to
satisfy the constant needs of an important section of the population consisting of the very
young , the old and the sick.” Paragraph 31 27/76, United Brands & Co and United
Brands Continental BV v. Commission [1978] 1 CMLR 429
10
11
Ilba 2
EC Competition Law, Second Edition, Alison Jones and Brenda Sufrin , Page: 300, 301
13
Ibid United Brands
12
6
can be distinguished from neighboring areas because the conditions of
competition are appreciably different in those areas”14
26- Geographic market depends on a number of factors. One of them is
transportation. For instance, if the transportation is not expensive for a
product and has a profit for the consumer to buy the product from other
place, the breadth of market for this product is extended.
27- Nature of the product is the other important factor. If product cost is
cheaper than transportation, the geographic market would be narrow.
For instance, the geographic market of some products like diamond or
microchip is very wide. Therefore, two factors, i.e., transportation and
nature of the product are very important for determining the relevant
geographic market.
28- It should be mentioned that, the Courts and Commission make
distinction between Competition Laws and intellectual property Acts.
The SSNIP Test
29- In 1984, the US Department of Justice Merger Guidelines set out a
‘hypothetical monopoly test’. This test was designed for assessing the
market power and for defining antitrust market in the USA. In 1997, the
Commission stated the importance of SSNIP or the hypothetical
monopoly test in measuring “a sufficient degree of
interchangeability.”15
30- SSNIP 16 stands for “small but significant and non-transitory increase in
prices”. By using the SSNIP test, it is determined “whether a small (510 percent) but non- transitory increase in the price of a product would
cause consumers to buy another product instead” 17. It can be said that,
an increase in the price of product A (if the price is not profitable)
would lead the consumer to buy product B instead, if A and B are
available in the same market.
31- In fact, SSNIP test focuses on the price changes between Substitutes and
Complements.
14
http://europa.eu.int/scadplus/leg/en/lvb/l26073.htm
Case 85/76 , Hoffmann- La Roche & Co AG v. Commission [1979] ECR 461 , 3 CMLR 211, Paragraph
28
16
In Economic term called “ cross-price elasticity of demand”
17
EC Competition Law, Second Edition, Alison Jones and Brenda Sufrin , Page: 307
15
7
32- The formula for SSNIP test or Cross Price Elasticity of Demand is as
follows: % change in the demand for Good A divided by % change in
the price of Good B.
Determining the Dominance
33- After determining the relented market, it has to be cleared whether the
firm has a dominant position in the relevant market. Some factors are
important to establish the dominance. Some of them are as follows:
1- Market share
2- Barriers to entry:
a) Access to raw materials and markets
b) Financial and technical resources
c) Economies of scale
d) Behavior
e) Access to financial resources
f) Access to key inputs
g) Profits
Market share:
34- In the case of telecommunication, according to the ECJ, the percentage
of the market owned or controlled necessary to constitute a dominant
position is not static. ECJ held a firm with market share of 10% is close
to be dominant.
35- In some cases, the ECJ has found a dominant position in cases ranging
from ninety percent market share, and in United Brands case only a
forty to forty-five percent market share.18 19
36- In United Brands the barriers to entry for other firms were high, thus,
United Brands had dominance for banana over four years. The ECJ held
that, market share of 45% together with other factors is enough to hold
a firm dominant.
37- In Hoffman La Roche, the ECJ held that Roche has a market between
64% to 90% , and also, commission stated that Roche was dominant on
18
51/89 Tetra Pak Rausing SA v. Commission, 1990 E.C.R. II-3416, 4 C.M.L.R. 334 [1990].
27/76 United Brands Company and United Brands Continentaal BV v. The Commission of the European
Communities [1978] 1 C.M.L.R. 429
19
8
market share combined with additional factors are enough for the
existence of dominant position.”20 In this case the court expressed
market share by value and quantity over three years.21 The court defined
the market share of various vitamins as follows:
1- between 75% to 78% is indicative of dominant position
2- between 84% to 90% dominant position exist
3- between 93% to 100% has a monopoly.
38- Further more, market share under 70% with other factors can be
considered as dominance.
100
90
80
70
60
50
40
30
20
10
0
"Evidence of "Existance "Monopoly"
Dominant of Dominant
Position"
Position"
22
39- Therefore, the court stated where an undertaking has a high market
share, “there is a presumption of dominance.”23
Barriers to entry:
40- Barriers to entry are some factors that act as obstacles in the way of
potential newcomers to enter the relevant market. Large market share,
control of essential raw materials, large capital requirements to set up a
firm, strong consumer preferences for the products of established firms
are among barriers to entry. These Barriers to entry, as the ECJ and
Commission put it, are very important as the result of which firms may
be dominant even if they lack large market share.
20
C-85/76 Haffman La Roche
EC Competition Law, Second Edition, Alison Jones and Brenda Sufrin , Page: 341
22
Ibid page 340
23
EC Competition Law, Second Edition, Alison Jones and Brenda Sufrin , Page: 341
21
9
41- Economists believe that firms are dominant if barriers to entry exists. As
Stilger stated: “It is a cost which must be borne by a firm that seeks to
enter an industry but it is not borne by firms already in the industry”. 24
But, the US Chicago School of Economics, has wider definition of
barriers to entry: “anything , which has an effect of impeding entry to a
market, even if the incumbent had to incur similar expenditure when it
entered the market.”
42- A- Access to raw material and markets:
A firm which has high percentage of the product and distributive
process and acting independently has more potential to be dominant
than undertaking which is dependent on other material like raw
materials.25
43- B- Financial and technical resources:
An undertaking with substantial financial resources can have dominant
position and can eliminate competitors. Also superior technology
possessed by an undertaking may operates as barriers to entry.26
44- C-Economies of Scale
ECJ in the United brands case defined economies of scale operate as
barriers to entry. Economies of scale means that where the average cost
of producing a good per unit decreases the volume of production
increases27, as the result the producer produce at a lower cost per unit.
45- D- Behavior
An undertaking’s behavior may be considered as an evidence of its
dominance. In United Brands and Eurofix & Bauco V. Hilti, the
commission decided that Hilti’s behavior shows, its ability to act
Stigler, 1968, page. 67 “Paper Title: What Is a Barrier to Entry?
R. Preston McAfee , Humanities and Social Sciences, California Institute of
Technology” and “Hugo M. Mialon, Department of Economics, University of Texas at Austin,” and
“Michael A. Williams,”
25
United Brands, has everything like fleets of refrigerated vessels and refrigerated warehouses and they
own plantation to produce banana.
26
United Brands, Tetra pack cases , ECJ in the case of United brands stated superior technology could be
as an indicator of dominance.
27
http://en.wikipedia.org/wiki/Economies_of_scale
24
10
independently and without taking into consideration other competitors
and consumers.28
46- E- Access to financial resources
The commission stated in Continental Can 29case that if an undertaking
has access to international capital market it is an indication of its
dominance. New competitors need the market at an efficient scale.
They need capital to set up their undertakings, to cover their production
and losses at the early stages of entry to the market.
47- F- Access to key Inputs
It means that a new competitor can not enter the new market because it
does not have access to key inputs. An undertaking may have access to
many key inputs such as airport or properties which are covered by the
intellectual property rights that are unavailable to new competitors.30
48- G- Profits
It is possible to identify market power by determining profit of an
undertaking. In United Brands31 and Michelin32, the ECJ stated: “ An
undertaking’s economic strength is not measured by profit alone, losses
at least temporary, may also demonstrate the economic strength.”33
Conclusion
49- Market power and dominance will cause monopoly and oligopoly, both
of which injure the economy. They create barriers and prevent
newcomers entering the market that have adverse affect on the
economy.
28
88/138/EEC: Commission Decision of 22 December 1987 relating to a proceeding under Article 86 of
the EEC Treaty (IV/30.787 and 31.488 - Eurofix-Bauco v. Hilti)
Official Journal L 065 , 11/03/1988 p. 0019 - 0044 paragraph: IV and Article European community law ,
lecture 2 page 7
“http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexdoc!prod!CELEXnumdoc&lg=EN&numdoc=319
88D0138&model=lex”
29
Continental Can Co [1972] JO L7/25, [1972] CMLR D11
30
EC Competition Law, Second Edition, Alison Jones and Brenda Sufrin , Page: 359
31
27/76 United Brands Company and United Brands Continental BV v. The Commission of the European
Communities [1978] 1 C.M.L.R. 429 ECR 207
32
322/81, NV Nederlandsche Banden Industre Michelin V. Commission [1983] ECR 3461, [1985] I
CMLR 282
33
Ibid page 262
11
50- EC Competition Regulations, prohibit undertakings to abuse their
dominant position. In fact, according to article 82, EC Competition
Rules protect competitors from dominance, monopoly or oligopoly. As
it was said, dominant position is not necessarily equivalent to
monopolistic position, albeit, a monopolistic undertaking generally is in
a dominant position.
51- Many factors are involved for defining dominance, not to forget that
because of these factors case by case need to be assessed.
52- EU Competition Rules, by defining the relevant product market and the
geographic product market have provided criteria for determining a
dominant position and a significant market power. Besides as I
mentioned, many factors, such as barriers to entry, have to be
considered for deciding about a dominant position.
53- If a firm has 70% of market share, it is a strong evidence of market
power. In addition, an undertaking with 40% of market share can be in
a dominant position if other factors related to barriers to entry are
present. Having 10% of market share is too small to say a firm is
dominant but by holding more than 40% share, a firm could be in the
position of dominance.
54- By using SSNIP test, EU can measure market share and by due
consideration of other factors that act as barriers to entry, it can
determine dominance.
12
Bibliography
Cases and Regulations
27/76, United Brands Co and United Brand Continental BV V. Commission
ECR 207, CMLR 429 [1978]
6/72, Europemballage corp and continental Can Co Inc V Commission 1973
ECR 215 ,
http://europa.eu.int/scadplus/leg/en/lvb/l26073.htm Date: 03/01/2005
51/89 Tetra Pak Rausing SA v. Commission, 1990 E.C.R. II-3416, 4
C.M.L.R. 334 [1990].
Case 85/76 , Hoffmann- La Roche & Co AG v. Commission [1979] ECR
461 , 3 CMLR 211,
322/81, NV Nederlandsche Banden Industre Michelin V. Commission
[1983] ECR 3461, [1985] I CMLR 282
Article 82 and 81 of the EC Treaty
Books
EC Competition Law: Text, cases and Materials, Second Edition, Alison
Jones and Brenda Sufrin , Oxford 2004
EC Competition Law, D.G. Goyder, Oxford, 2003
Articles
Published in the Official Journal of European Commission: OJ C 372 on
9/12/1997
http://europa.eu.int/scadplus/leg/en/lvb/l26073.htm
Official Journal L 065 , 11/03/1988
What Is a Barrier to Entry?
13
R. Preston McAfee , Humanities and Social Sciences, California Institute of
Technology” and “Hugo M. Mialon, Department of Economics, University
of Texas at Austin,” and “Michael A. Williams,”
THE CONCEPT OF MARKET AS INTERPRETED BY THE EUROPEAN
COMMISSION AND THE COURT OF JUSTICE
JAANIKA ERNE, University of Helsinki, student, University of Tartu
Article 82 and the Chapter II , Prohibition, Draft competition law guideline
for consultation , Office of Fair Trading ,April 2004
Market Definition in Oligopolistic and Vertically-Related Markets: Some
Anomalies , David Harbord and Georg von Graevenitz
Websites
In Economic term called “”
http://en.wikipedia.org/wiki/Economies_of_scale
Official Journal L 065 , 11/03/1988 p. 0019 – 0044
Article European community law ,
http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexdoc!prod!CELEXn
umdoc&lg=EN&numdoc=31988D0138&model=lex”
14