Lecture Six: Monopolization and Abuse of Dominance
Learning Objectives
z Student should learn
– About what means of dominance
– About the problem of defining the threshold of dominance
– About what joint dominance
– Application of the anti-trust rule on controlling abuse of predatory pricing
Competition Law and Dominance
Competition law does not concern itself with unilateral behaviour by
individual firms unless a firm is dominant.
z The monopoly power requirement under US monopolization doctrine is that,
as a prerequisite to anti-trust liability
z A threshold significant market power as a screen
– Whether a single-firm behaviour should be regulated
– Whether the behaviour is anti-competitive
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The monopoly requirement is the threshold that avoid substantial costs of
administration, mistaken prohibition, and inhibition of competitive vigour
– Threshold is higher than merger guideline
– More substantial problem of positive false (Type I error) and related
chilling effects
Magnitude of incremental harm if price does rise, when the price is higher
– More on total surplus
– Less on Consumer surplus
z The monopoly threshold requirement should be related to
How high should the market power requirement be?
– What is the potential error in the market power enquiry?
– It should relate to the challenged practises
z Application to the challenged practices, the crucial question should be
– Will the challenged practices significantly remove or relax constraints on
the defendant’s pricing?
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Focus should be on harm to competitive process
z Neither Sherman Act, nor EU Treaty, presumes that possession of a dominant
position offensive.
z Concern is with practices or conducts by dominant firms that are designed to
reduce or even eliminate competition.
z Dominant firm “has a special responsibility not to allow its conduct to impair
undistorted competition…”
Case 322/81 Michelin v. Commission [1983] ECR 3461, Para 57.
Thin Dividing Line between Abuse and Aggressive Competition
z Competition law should not discourage large firms from competing
aggressively.
z “A single producer may be the survivor out of a group of active competitors,
merely by virtue of his superior skill, foresight and industry. In such cases a
strong argument can be made that, although, the result may expose the public
to the evils of monopoly, the Act does not mean to condemn the resultant of
those very forces which it is its prime object to foster: finis opus coronat. The
successful competitor, having been urged to compete, must not be turned
upon when he wins.”
z Justice Learned Hand, United States v Aluminum Company of America, et. al., 148
F.2d 416 (2ndCir.1945)
Definition
z “The [ECJ] emphasizes the notion of a dominant firm’s independence from
competitive forces normally constraining a supplier in the market. This does
not mean that a firm must, in order to be dominant, be able to ignore
competition entirely and simply do as it wishes by, for example, raising prices
without any constraint. Indeed, a firm can be dominant even in circumstances
where it must sometimes take competitive factors into account in determining
its commercial behavior. If, however, a firm can substantially disregard, and
keep safely at bay, its competitors over a long period of time, this is a clear
indication of dominance.” (Faull and Nikpay, The EC Law of Competition, p.123)
Dominance = Power to Raise Price
z “..the fact that an undertaking is compelled by the pressure of its competitors’
price reductions to lower its own prices is in general incompatible with that
independent conduct which is the hallmark of a dominant position”.
z Hoffman LaRoche v. Commission [1979] ECR 461.
z “The evidence in this case is to the effect that Eircell has been and is forced by
the pressure of Digifone’s price reductions to lower its own prices and that is
incompatible with the independent conduct of the type described in a
situation of dominance.”
z Meridian Communications Limited and Cellular Three Limited v. Eircell
Limited , Judgment of 5 April 2001, p.61.
Dominance Threshold and Effect of the Abuse
z Market Power = Mark up
z Before the abuse:
(p-mc)/p =1/|ε11|, |ε11| = 1 + 1/s1∑si εi1
–
z After the abuse:
(p-mc)/p =1/|ε*11|, |ε*11| = 1 + 1/s1∑si ε*i1
–
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To consider the initial market power level |ε11|
To consider the effect of the abuse substantiating market power level
z Effect of the abuse = |ε11| - |ε*11|
Problem of the test and threshold
Market Share May Indicate Dominance but is not Conclusive
z Akzo [1991] ECR I 3359 ECJ considered that a stable market share of 50 per cent
or more raised a reputable presumption of dominance.
z “An undertaking which has a large market share and holds it for some time,
by means of the volume of production and the scale of the supply which it
stands for – without those having much smaller market shares being able to
meet rapidly the demand from those who would like to break away from the
undertaking which has the largest market share – is by virtue of that share in a
position of strength which makes it an unavoidable trading partner and which,
already because of this secures for it, at the very least during very long periods,
that freedom of action which is the special feature of a dominant position."
Hoffman LaRoche v. Commission, Case 102/77 [1979] ECR 461.
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“Microsoft certainly had the ability to raise prices significantly above marginal
costs. Indeed, Microsoft possessed the ability to raise prices significantly above
long-run average costs, as suggested by the large multiple of Microsoft’s
market value to the cost of its asset base.”
Gilbert, R.J. and Katz, M.L., (2001): An Economist‘s Guide to US v. Microsoft,
Journal of Economic Perspectives, 15(2), (Spring) 25-44.
|εF| =1/s [ |εD| + (1-s) εR], where s is the share of the dominant firm, εD is the
market demand elasticity εF is the firm demand elasticity and εR is the supply
response elasticity
– High s does not imply high |εF|
Joint Dominance, a EU Provision
z Commission in Italian Flat Glass claimed that collusive behavior, which it
found to be in breach of Article 81, also constituted an abuse of a collective
dominant position under Article 82.
z CFI rejected case but he Commission can establish a breach of Article 82
because the EU competition law, abuse of dominance is not only against single
firm.
z “..in order for such a collective dominant position to exist, the undertakings in
the group must be linked in such a way that they adopt the same conduct on
the market..” Case C-393/92 Almelo v. NV Energiebedriif Ijsselmij [1994] ECR
I-1477.
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Notice on Access Agreements in the Telecommunications Sector OJ [1998] L55/52
“The Commission does not, however, consider that either economic theory
or community law implies that such links (explicit agreements) are legally
necessary for a joint dominant position to exist. It is a sufficient economic
link if there is the kind of interdependence which often comes about in
oligopolistic situations.”
O’Higgins, J. in Cellular Three did not consider Eircell and Digifone to be
jointly dominant despite the existence of a duopoly with a 60/40 split in the
market.
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Joint Dominance in US, Substantially Market Power
z FTC Ready to Eat Breakfast Cereals Case. In the matter of Kellogg et. al., 99 FTC
8 (1982).
– Qaker, Kellogg, General Mills and General Foods combined market share of
90%. Quaker dropped from action, other three firms combined market
share of 81%.
– Product proliferation theory
– For a detailed description, see Schmalensee, R., (1978): Entry Deterrence in
the Ready-to-Eat Breakfast Cereal Industry, Bell Journal of Economics, 9:
305-27.
z ECJ and the CFI have shown a greater propensity to accept oligopoly
arguments as indicating joint dominance in merger cases. Consistent with
economic theory, while it may not be possible to prevent many forms of
oligopolistic behaviour, legitimate to prevent the emergence of oligopoly
market structures by means of merger controls.
Economic Definition of Joint Dominance
z Theoretical Firm Market Power (Mark up), a Cournot Approach :
– Individual market power (p-mci)/p = si/|εD|
– Group Market Power = ∑si (p-mci)/p = ∑si si/|εD|
– = HHI /|εD|
z Theoretical Firm Market Power (Mark up), a Bertrand Approach :
– Individual market power (pi - mci)/pi = 1/|εi|
– Group Market Power = ∑si (pi - mci)/pi = ∑si /|εi|
– As many firm si is small and |εi| is large, the group market power is
determined by the dominant firm sj /|εj|
Defining Abusive Behaviour
z “The scope for single-firm anti-competitive practices is limited only by human
ingenuity.”
– Clarke, R., (1985): Industrial Economics, Oxford: Blackwell.
Types of Abusive Behaviour
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Predatory pricing;
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Limit Pricing;
Monopoly Pricing;
Price discrimination;
Tying;
Denying competitors access to essential facilities;
Refusal to supply;
Raising rivals’ costs
Predatory Pricing
z Strategy of deliberately reducing profits (incurring losses) in order to eliminate
one or more rivals.
z Has been extremely controversial.
z Viewed with great suspicion by US Courts
z Very few cases proven
z ESC/AkZo main EU case
Mogul Steamships Case
z Mogul Steamshipping Co. v. McGregor Gow & Co, [1892] AC 25.
z Shipping cartel on routes to and from China.
z When rival companies attempted to introduce sailings, cartel slashed prices –
“fighting ships”
z Lord Esher; prices “so low that if continued…they themselves could not carry
on the trade”.
z For a detailed economic analysis see Yamey, B., (1972): Predatory Price
Cutting: Notes and Comments, Journal of Law and Economics, 15: 129-42.
Definition of Predatory Pricing
z “In most general terms predatory pricing is defined in economic terms as a
price reduction that is profitable only because of the added market power the
predator gains from eliminating, disciplining or otherwise inhibiting the
competitive conduct of a rival or potential rival. Stated more precisely a
predatory price is a price that is profit maximizing only because of its
exclusionary or other anticompetitive effects.”
– Bolton, P., Bradley, J. and Riordan, M. (1999): Predatory Pricing, Strategic
Theory and Legal Policy. Available at
http://www.princeton.edu/~pbolton/BBRPrincetonDP.pdf
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Small firms have a clear incentive to allege predation by larger rivals:
‘so long as people in authority can be made to listen and perhaps persuaded to
do something, it may pay competitors to complain that someone is preying on
them. They have a natural interest in tying the hands of those who compete
for consumers’ favors.’
J. McGee, (1980), Predatory Pricing Revisited, Journal of Law and Economics,
Vol.23, 238-330 at 300.
Essential Elements for Price Cutting to be Predatory
z It must involve deliberately reducing profits (or even incurring a loss) for a
period of time.
z It must have as its objective the elimination of one or more competitors, or at
least be designed to weaken them to such a degree that they can no longer
offer strong competition or otherwise discourage competition.
z It is essential that the predator be able to earn supra-normal profits in the
future for predation to be worthwhile and this in turn requires the existence of
barriers to entry, otherwise attempts to raise prices following predation will be
undermined by new entry.
What Prices Are Predatory?
z Areeda-Turner Rule proposed that prices below MC are predatory.
z AVC could be used as a proxy for MC
z Areeda, P. and Turner, D.F., (1975): Predatory Pricing and Related Issues
Under Section 2 of the Sherman Act, Harvard Law Review, 88: 697-733.
Areeda-Turner Highly Controversial
z Rule designed to restrain firms’ pricing behaviour as little as possible
reflecting authors’ view that predation was rare.
z “For all practical purposes, the Areeda-Turner price-cost relationship is
impossible to measure and makes the proof of predation too difficult.”
z L. Phlips, (1995): Competition Policy: A Game-Theoretic Perspective, Cambridge
University Press, p.233.
z “The simplicity of their test may explain why it was adopted with remarkable
speed by American judicial circles.” Phlips, p.231.
EU Cases
z ECS/AKZO. ECJ held that prices below AVC were predatory. It went further
and stated that prices below average total costs “must be regarded as abusive
if they are determined as part of a plan for eliminating a competitor.” (Emphasis
added).
z Where there is evidence of intent on the part of the alleged predator, it is not
necessary to satisfy the Areeda-Turner rule. Arguably, harming competitors is
the essence of the competitive Phlips (1995) argues that Akzo was a case of
Stackleberg warfare rather than predation, noting that the case illustrates the
difficulties involved in distinguishing predation from aggressive competition.
– Akzo B.V .v. E.C. Commission. [1993] CMLR 215
– See Korah (1995) For description of case.
Are Prices Below AVC Always Predatory?
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Australian Competition and Consumer Commission v. Boral 2003], 195 ALR 574.
ACCC argued that evidence of selling below AVC per se conclusive evidence
of predation.
Appeal court accepted that low prices were due to a severe recession in the
building industry combined with overcapacity in the concrete masonry
products industry, which enabled builders to extract lower prices from Boral
and its rivals.
Compagnie Maritime Belge v. Commission Cases C-395/96 P [2000] 4 CMLR 1076
ECJ upheld Commission’s condemnation of the use of “fighting ships” by the
members of a liner shipping conference.
Whenever a new entrant announced a sailing the freight rate for the
conference sailing nearest in date on the same route was reduced to the same
price as the entrant’s at the collective expense of the conference members.
ECJ did not apply a cost threshold.
Held that selective price cutting by collectively dominant firms was capable of
being abusive in its own right.
Brook Decision
z Brooke melded them into a more fully articulated judicial policy.
z First, predatory pricing required proof of below cost pricing, but the Court did
not embrace a particular cost test, such as AVC. Clearly, however, a price
could not be predatory unless it was below some measure of cost or even
“some measure of incremental cost.”.
z Second, and most strikingly, predatory pricing required proof of
recoupment—a dangerous probability, or under the Robinson-Patman Act a
reasonable prospect, that the predator can later raise price sufficient to recoup
its investment in below cost pricing.
A Proposal
z Legal Elements - Prima Facie Case
– Facilitating Market Structure
– Scheme of Predation and Supporting Evidence
– Probable Recoupment
– Price Below Cost
z Legal Elements – Efficiencies Justification
– Defensive Business Justifications
– Market Expanding Efficiencies Defenses
Various Alternatives Suggested
z Williamson, O.E., (1977): Increase in output by incumbent in response to entry
should be deemed predatory.
z Baumol, W.J., (1979): If firm prepared to credibly commit to maintaining lower
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prices for a sufficient period of time, indicates not engaged in predation.
Baumol, W.J., (1996): Average avoidable cost rather than average variable cost
as threshold for predation.
Ordover and Willig (1991) wider definition predation any business strategy
that is profitable only because of long-run benefits of eliminating one or more
competitors. Definition captures both price and non-price conduct.
Gilbert and Katz (2001) argue Ordover-Willig definition should be modified as
consumers can be harmed when prey is weakened, even if it is not eliminated.
US v. American Airlines, Inc., et. al. Judgment of 27 April 2001, on DoJ website
– No evidence of pricing below AVC; American had matched but not
undercut fares of low cost entrants and evidence that low cost operators
continued to enter the market.
– Court held that firm must be likely to earn super-normal profits in the
specific market in which predation occurs. Inconsistent with reputation model.
US v. Microsoft, argued that Microsoft had engaged in predatory behavior on
the grounds that “Microsoft could recoup the costs of engaging in the behavior
only if Netscape were eliminated as a threat to Windows.” Ordover-Willig
definition.
Matsushita v. Zenith
z US Case of Collective Predatory Pricing
z The Case and US TV market in 1970
z The main issue
z Economic evidence
The TV Market in 1970’s
z TVs are consumer durable
z US industry was the world leader in production volume and quality until the
mid-1960
z Birth of Japanese TV industry because of licensing arrangement from US and
European firms
– Zenth 23.8% and RCA 20.1%whereas total Japanese share was 30% in 1970’s
(increase from 10% in 1965)
The Case
z Case involved large Japanese manufacturers: Matsusita, Toshiba, Hitachi,
Sharp, Sanyo, Sony, and Mitsubishi, combined sales over $20 billions
z US companies involved are Zenth and NUE
z The basic charge against the Japanese firms was that they were engaged in a
massive global conspiracy lasting more than two decades whose purpose was
to destroy the American television industry
z Mechanics of Joint behavior of Japanese firms
Japanese government MITI “Check”
– JMEA’s “Five Companies Rule”
z The Conspiracy
– Price-fixing to charge monopoly price in Japan
– Profit gain in Japan to finance its collective predatory in US
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The Case of Predation
z Areeda-Turner type test
z Predation as investment
z Two elements
– Below-cost pricing
– Recoupment
z Other theories not used in this case
– Reputation effect
– Irrationality, would-be predator mistakes
US TV Market in 1970s’
The Main Issue
z Necessary conditions for predatory pricing
– Market power
– Incentive of cheating, the incentive to sell less than its share of jointly
mandated amount
z Why TVs sold in Japan and US should have the same price?
– The law of one price
z Why the agreement of price fixing not against the law?
z War-chesting theory of predation
Legal Arguments
z No evident to show Japanese firms collectively with market power
z Incentive to sell more than its share of jointly mandated amount rule out the
incentive criterion to maintain the cartel
z Reason why TVs sold in Japan and US have the different prices
z Act of state and sovereign compulsion doctrine
z Opportunity cost of war-chesting theory
Criticism of US Courts views on predation
z “At the same time modern economic analysis has developed coherent theories
of predation, contravening earlier economic writing claiming that predatory
pricing is irrational. More than that, it is now the consensus that predatory
pricing can be a successful and fully rational business strategy; and we know
of no major economic article in the last 30 years that has claimed otherwise.”
z “But the courts have failed to incorporate the modern writing into judicial
decisions, relying instead on earlier theories no longer generally accepted.”
z Bolton, P., Bradley, J. and Riordan, M.: Predatory Pricing, Strategic Theory and
Legal Policy.
z Earlier analysis dismissing predation as irrational behavior relies on
assumptions of certainty and perfect information.
z Game theoretic models show that, with uncertainty and information
asymmetry between incumbent and entrant, predatory strategy makes sense.