MARKET POWER IN COMPETITION CASES

1. MARKET POWER IN COMPETITION CASES John Vickers Oxford University BIICL conference on Reform of Article 82 24 February 2006

2. Market power debates • 25 years ago • Landes and Posner, Harvard Law Review 1981 • Their constructive critics • 1982 US Merger Guidelines • Now • Dominance in the Article 82 review • Courts, economists, DG Competition

3. Plan of remarks • Key points from the Harvard Law Review debate • The weighted market share approach • ‘The law’ and ‘the economists’ on market power in the assessment of abuse • Dominance in the Commission’s paper • Empirical methods  perhaps the greatest area of advance  beyond my scope today

4. Landes and Posner on market power • Market power as ability profitably to price substantially above marginal cost • Measured by mark-up (‘Lerner index’) • Single-product dominant firm example • Mark-up inversely related to own-price elasticity. Can also be expressed in terms of • market share • industry elasticity of demand • elasticity of supply from competitive fringe

5. Landes and Posner on market power • Market share is never the whole market power story • Whether intervention makes sense depends on market size and the alleged abuse as well as market power measure • Discussion of market definition, etc. • Suggestion that courts would welcome the assistance that the economic approach provides, and that it would not “create an unacceptable discontinuity with conventional legal thinking about market power”

6. Some points made in response • Need for dynamic approach  only persistent market power is of concern, hence focus on exclusionary abuse (Schmalensee, HLR 1982) • Need to extend beyond single-firm dominant firm analysis (thus Ordover et al on oligopoly) • Still too much emphasis on market shares; need also to weigh evidence on conduct and persistent profits (Schmalensee)

7. The weighted market share approach • Traditional (indirect) approach to market power assessment has market definition and shares as first step (cf direct econometric methods) • But “substitutability is a question of degree” • Dangers of the ‘zero-one’ approach • Does there exist a method of weighting product revenues that yields mark-up expressions related to weighted market shares for the general and real case of differentiated products and multi-product firms? • Theoretical work in progress

8. Economists and the law  a contrast? • On the assessment of dominance compare • CFI in GE v Commission (§§92-280) with • The EAGCP report: ‘An economic approach to Article 82’ • Market share analysis central to the former • While the latter might be taken to suggest that dominance analysis is relegated …

9. EAGCP on the place of dominance “the economic approach implies that there is no need to establish a preliminary and separate assessment of dominance. Rather, the emphasis is on the establishment of a verifiable and consistent account of significant competitive harm, since such an anti-competitive effect is what really matters and is already proof of dominance” • A lapse into ‘abuse ergo dominance’? No • The call is to integrate dominance analysis into effects-based abuse assessment • But preliminary dominance assessment still useful

10. Dominance in the Commission’s paper • Rather conventional given the nature of the review of Article 82 policy • Why the discussion of collective dominance, now that ECMR reform has freed ‘dominance’ from its former dual task? • Right that market power “may derive from several factors which, taken separately, are not necessarily determinative” • But then …

11. Paragraph 31 “It is very likely that very high market shares, which have been held for some time, indicate a dominant position. This would be the case where an undertaking holds 50% or more of the market, provided that rivals hold a much smaller share of the market. In the case of lower market shares, dominance is more likely to be found in the market share range of 40% to 50% than below 40%, although also undertakings with market shares below 40% could be considered to be in a dominant position. However, undertakings with market shares of no more than 25% are not likely toenjoy a (single) dominant position on the market concerned.” • Too market-sharist? • Too close to being a sufficient condition for dominance? • Why suggest possible dominance at such low shares?

12. Need for disciplined dominance analysis • Dominance is an economic finding with legal and commercial consequences, not a jurisdictional hurdle • Effects-based policy towards abuse is needed together with a complementary disciplined approach to dominance assessment • Commission should reflect further and harder on this • No discontinuity: the courts can embrace disciplined economic approaches as European law on market power evolves

13. MARKET POWER IN COMPETITION CASES john.vickers@economics.ox.ac.uk