For Official Use
DAF/COMP/WP3/M(2006)2/ANN4
Organisation de Coopération et de Développement Économiques
Organisation for Economic Co-operation and Development
08-Sep-2008
___________________________________________________________________________________________
English - Or. English
DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS
COMPETITION COMMITTEE
DAF/COMP/WP3/M(2006)2/ANN4
For Official Use
Working Party No. 3 on Co-operation and Enforcement
EXECUTIVE SUMMARY OF THE ROUNDTABLE ON TECHNIQUES AND EVIDENTIARY ISSUES
IN PROVING DOMINANCE/MONOPOLY POWER
7 June 2006
Competition Delegates will find attached FOR INFORMATION the Executive Summary by the Secretariat of the
roundtable on techniques and evidentiary issues in proving dominance/monopoly power.
Please contact Mr. Antonio Capobianco if you have any questions regarding this document [phone
number: +33 1 45 24 98 08 - E-mail address: [email protected]].
English - Or. English
JT03250124
Document complet disponible sur OLIS dans son format d'origine
Complete document available on OLIS in its original format
DAF/COMP/WP3/M(2006)2/ANN4
EXECUTIVE SUMMARY
By the Secretariat
(1)
Different jurisdictions use different definitions and tests to identify firms that are subject to
single firm conduct provisions. Overall, competition regimes are converging toward the notion
that single firm conduct provisions should be applied only to firms that have "substantial
market power".
1.
Unilateral acts by a firm with a high degree of market power are much more likely to distort the
competitive process and ultimately harm consumer welfare than conduct by a firm that has no or little
market power. Competition laws and judicial practice use a wide range of different terms and definitions
to identify firms that are subject to single firm conduct provisions, including “dominance”, “monopoly
power” and “substantial degree of market power”. But whatever they call them, different competition
regimes are converging toward the notion that single firm conduct provisions should be applied only to
firms that have "substantial market power".
2.
Substantial market power” can be said to exist 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. To distinguish between instances of “normal,
everyday” non-substantial market power and the type of market power that should trigger heightened
scrutiny under single-firm conduct provisions, it is important to determine whether market power is
durable, i.e., whether it can be maintained for a considerable period of time. The emphasis on durability of
market power explains why the question of entry barriers and barriers to expansion is an essential step in
determining whether a firm has substantial market power.
(2)
Competition authorities and courts rely primarily on indirect evidence to determine whether a
firm has substantial market power such as market shares, barriers to entry and expansion,
buyer power and the nature of competition in the market. Typically there is no single factor
that will provide conclusive answers. Entry barriers and barriers to expansion are widely
considered the most important factors in determining whether a company’s ability to exercise
market power is effectively constrained.
3.
Entry barriers are arguably the single most important factor in assessing whether a firm has
substantial market power. If other firms can enter or rivals can expand, a firm will not be able to maintain
market power in the long run; hence its market power will not be durable. Barriers to entry and expansion
are thus a necessary, but not a sufficient condition, for the finding of substantial market power. Markets
can be competitive and characterized by vigorous price competition even if entry barriers are high.
4.
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 decision-maker might
conclude too hastily and incorrectly that entry barriers are low, for example, when entry appears possible
but in fact would not constrain market power. Conversely, there is a risk that once high market shares have
been found, the existence of entry barriers is assumed without sufficient factual inquiry.
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(3)
There can be types of indirect evidence that allow competition authorities and courts to draw
conclusions from structural market characteristics for the question of whether a firm's market
power is substantial and durable. Other important types of indirect evidence include
competitive conditions in the market and countervailing buyer power.
5.
An economically strong customer can deny a firm the ability to exercise substantial market power
and to engage in anticompetitive conduct. It is not necessarily the economic strength of the buyer that
counts, however. Buyer power is most relevant when the buyer has an effective alternative choice, for
example, because of the ability to switch to another supplier, to vertically integrate, or to "sponsor" entry of
a new supplier. Thus, buyer power can be recast to a certain extent in terms of barriers to entry and
expansion. Further to that, a buyer’s threat to switch to another supplier may have a considerable
disciplinary effect on a supplier that sells a major part of its production to a single buyer. The unilateral
anticompetitive act itself, for example an act that ties up all existing distributors of a product, may act as a
barrier to entry or expansion, if a rival cannot find cost-effective alternatives for distribution.
(4)
Market share data continue to be the “high priest” in assessing whether a firm has substantial
market power, although the limitations of market shares as proxy of market power are widely
acknowledged.
6.
Meaningful market share data depend on the ability to define a relevant market with some degree
of accuracy. Where market boundaries are difficult to draw, market concentration data are close to
arbitrary. This problem is particularly acute in single firm conduct cases because competition law and
policy has not yet developed a generally applicable economic model to determine a relevant market where
a firm already has exercised market power and raised price. Although in this situation one could try to
define the relevant market based on an “otherwise prevailing, competitive price level”, this method has a
high risk of leading to unreliable and inaccurate results.
7.
Even with accurate market definition, high market shares are not necessarily proof of substantial
market power. Any presumed correlation between high shares and market power will depend on how
competitors or customers can react when a firm restricts output, the reasons why the firm maintained high
market shares, and whether there are any other conditions that limit the firm's ability profitably to raise
price. These factors may ultimately become more relevant than market shares in establishing substantial
market power. High market share alone should therefore not be conclusive proof that a firm has substantial
market power.
8.
Market shares can nevertheless be a useful first step in competition analysis. In particular, they
can inform a decision maker as to whether a given case is more likely to raise oligopoly issues or single
firm conduct issues, thus leading the inquiry in the right direction.
(5)
Although market share based presumptions of substantial market power might be a convenient
tool for a decision maker, their use raises many of the same problems as the use of market
shares in general. Market shares can fail to correctly predict whether a firm has substantial
market power. Thus, market share-based presumptions must be used with great caution.
9.
As market share data depend critically on an accurate market definition, and high market shares
alone do not reliably identify cases of substantial market power, there is a risk that presumptions will not
be borne out in the sense that they capture firms that do not have substantial market power. There is also
the risk that market share-based presumptions strongly influence any further analysis and that a decisionmaker, once satisfied that market share-based presumptions have been triggered, analyzes remaining
evidence selectively with a view to confirming the initial result. Conversely, market share-based
presumptions with unreasonably high thresholds may create de facto “safe harbours” that benefit firms
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which may well possess substantial market power and therefore have the ability to engage in unilateral
conduct that harms consumers.
10.
In practice, much depends on how presumptions are used and how they influence the analysis of
other evidence of substantial market power. Market share can be valuable in establishing safe harbours,
although to date there is little consensus on where the relevant threshold for a meaningful, but not
excessive, market share should be set. Nevertheless, safe harbours can provide certainty for business and
help to promote efficiency. In addition, market share-based presumptions can be useful if they are used to
indicate that a case requires further analysis, without influencing the thoroughness and result of such
inquiry.
(6)
Direct evidence of substantial market power, 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 that a firm has the requisite degree
of market power. However, direct evidence may be useful to support a finding of substantial
market power in the appropriate circumstances, provided it is used in conjunction with other
evidence.
11.
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 attempts to measure 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 lower demand elasticity (that is, more
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. Although this methodology could in principle provide more precise and reliable evidence to gauge
market power than using market definition and market shares, it raises a series of problems, including the
need to gather large amounts of data and the difficulty in determining whether a firm that is found to have
some degree of market power has "substantial market power" under the applicable competition laws. In
addition, demand elasticities do not refer to the relationship between prices and long-run marginal costs
which would be more relevant to assess whether a firm’s market power is durable.
12.
One can also try to examine whether a firm's profitability is consistent with the finding that the
firm has substantial market power. There are a number of significant concerns associated with this
methodology, including the difficulty in obtaining accurate economic profitability data from accounting
data, the difficulty in ascertaining the competitive norm for a comparison, the possibility that supracompetitive profits may be explained by factors other than substantial, durable market power, and the
difficulty in obtaining data about long-term profitability. Profitability data therefore also play a limited role
in the analysis of substantial market power.
13.
Nevertheless, if high profits have been persistent and are consistent with other evidence, they
could in certain circumstances be used as an indicator of substantial market power. For example, some
competition authorities have found that unusually high profits could be relevant in a mature, capitalintensive commodity industry in which brand name, innovation and advertising are not important and
investments appear to have been earned back. By the same token, low profitability should not
automatically be regarded as evidence of the absence of substantial market power, as it could be the result
of a firm’s inefficiency.
14.
Conduct of a firm can also be considered as evidence in the analysis of substantial market power.
However, conduct in itself cannot be evidence of substantial market power without analysis of the
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circumstances in which it occurred. The analysis of price discrimination – charging different customers
different prices for the same item – illustrates this point. Price discrimination is a common practice, and
can be perfectly compatible with a competitive market. Thus, the fact that a firm engages in price
discrimination cannot in itself demonstrate that the firm has a degree of market power that should trigger
scrutiny under single firm conduct provisions. This does not exclude, however, the possibility that
persistent and systematic price discrimination can in the appropriate circumstances be one indicator that a
firm has substantial market power.
15.
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 the finding of substantial market power.
(7)
The analysis of substantial market power is an important element in single firm conduct cases.
If there is no substantial market power, there is no need to look at anticompetitive effects.
Analysis of substantial market power, however, is only one step in the analysis of single firm
conduct. Even if a firm is found to have substantial market power, competition authorities
must still find that the firm’s conduct has anti-competitive effects. Evidence that a firm has
substantial market power does not short-circuit the need to do a full analysis of the competitive
effects of the firm’s conduct before a violation is found.
16.
Some have argued that competitive effects should play a more immediate role in the analysis and
should be given greater weight than market shares and other structural factors and that the assessment of
market power should be an integrated component of the overall analysis in a single firm conduct case,
rather than a preliminary step. However, there is value in having a separate analysis of a firm’s market
power.
17.
A separate analysis of market power can help decision-makers eliminate cases where
anticompetitive effects are either highly unlikely or not feasible. Furthermore, without reference to the
market in which competition takes place, there is a risk in many cases that harm to the competitive process
cannot be adequately distinguished from harm to competitors. Moreover, in cases where competition
authorities or courts assess the likely future effects of certain conduct, the inquiry into market power will
be a necessary step to predict probable competitive effects. Last, if a separate step to examine and prove
substantial market power is eliminated and a competition authority adopted a “lenient” level of proof to
show anticompetitive effects, the threshold of intervention could be lowered, making it more likely that
conduct that does not harm consumer welfare will be condemned.
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