Dominance and monopoly

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The economist's depiction of deadweight loss to efficiency that monopolies cause
The economist's depiction of deadweight loss to efficiency that monopolies cause

Being one of three categories of a competition law, a law regulating dominance and monopoly prevents firms from using their market power to damage the interests of consumers. Other two legal categories not covered here are collusion and cartel law, and law regulating mergers and acquisitions.

Dominance and monopoly refer to the market power of firms or undertakings to raise prices, restrict production, and decrease the quality of goods and services. Together these issues have led legislature to establish laws protecting the consumers. Dominance and monopoly problems form the focus of much attention in competition, or antitrust, law.

A dominant position in a market is a question of what degree of market power a firm holds. A firm may be considered dominant in a market with a number of big players. This situation is termed an oligopoly, and that together firms have collective dominance. If there is only one major player in a market, the word monopoly is used. However the term monopoly power often refers to the wider phenomenon, which is a concentration of market power in one hand. In law, having a dominant position or a monopoly in the market is not illegal in itself. However certain categories of behaviour will, when a business is dominant, be considered abusive and be met with legal sanctions.

Contents

[edit] History

Common salt (sodium chloride) historically gave rise to natural monopolies. Until recently, a combination of strong sunshine and low humidity or an extension of peat marshes was necessary for winning salt from the sea, the most plentiful source. Changing sea levels periodically caused salt "famines" and communities were forced to depend upon those who controlled the scarce inland mines and salt springs, which were often in hostile areas (the Dead Sea, the Sahara desert) requiring well-organized security for transport, storage, and distribution. The "Gabelle", a notoriously high tax levied upon salt, played a role in the start of the French Revolution, when strict legal controls were in place over who was allowed to sell and distribute salt. Advocates of laissez-faire capitalism, such as the Austrian school, maintain that a salt monopoly would never develop without such government intervention.

Examples of alleged and legal monopolies

[edit] Dominance

Competition law
Basic concepts
Anti-competitive practices
Laws and doctrines

United States

Europe

Australia
Enforcement authorities and organizations
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See also: Monopoly, Monopsony, Oligopoly, and Oligopsony

Dominance is an expression that covers the different degrees of market power that large firms may exercise. A considerable body of economic theory lies behind a determination of whether a firm may be dominant. If Competition law authorities do show a firm is dominant, then they may go on to prove that the position of power has been abused.

[edit] Economics

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Main article: Dominance (economics)

Kwoka's dominance index (D) is defined as the sum of the squared differences between each firm's share and the next largest share in a market:

D = \sum_{i=1}^{n-1} (s_i-s_{i+1})^2

where

s_1 \ge ... \ge s_i \ge s_{i+1} \ge ... \ge s_n for all i = 1, ..., n - 1 (Kwoka, 1977).

As part of its merger review process, Mexican Competition Commission uses dominance index (ID), described as the Herfindahl index of a Herfindahl index (HHI). Formally, ID is the sum of squared firm contributions to the market HHI: ID = \sum_{i=1}^n h_i^2 where h_i = \left. s_i^2 \right/ HHI.

European Commission's Tenth Report on Competition implies that a significant disparity between the largest and the second-largest firm shares can indicate that the largest firm has a dominant position in the market. Specifically, under a section entitled "Scrutiny of mergers for compatibility with Article 86 EEC," the Report stated,

"A dominant position can generally be said to exist once a market share to the order of 40% to 45% is reached. [footnote: A dominant position cannot even be ruled out in respect of market shares between 20% and 40%; Ninth Report on Competition Policy, point 22.] Although this share does not in itself automatically give control of the market, if there are large gaps between the position of the firm concerned and those of its closest competitors and also other factors likely to place it at an advantage as regards competition, a dominant position may well exist.[1]

Asymmetry Index (AI) is defined as the statistical variance of market shares: AI=\left.\sum_{i=1}^n \left(s_i- {1 \over n}\right)^2 \right/n. See Brown and Warren-Boulton (1988), also see Warren-Boulton (1990).

[edit] Law

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The existence of a very high market share does not always mean consumers are paying excessive prices since the threat of new entrants to the market can restrain a high-market-share firm's price increases. Competition law does not make merely having a monopoly illegal, but rather abusing the power the a monopoly may confer, for instance through exclusionary practices.

First it is necessary to determine whether a firm is dominant, or whether it behaves "to an appreciable extent independently of its competitors, customers and ultimately of its consumer."[2] As with collusive conduct, market shares are determined with reference to the particular market in which the firm and product in question is sold.

Under EU law, very large market shares raise a presumption that a firm is dominant,[3] which may be rebuttable.[4] If a firm has a dominant position, then there is "a special responsibility not to allow its conduct to impair competition on the common market".[5] The lowest yet market share of a firm considered "dominant" in the EU was 39.7%.[6]

  • DG Competition discussion paper on the application of Article 82 of the Treaty to exclusionary abuses.
  • United States v. du Pont & Co. (the Cellophane case)
  • US DOJ/FTC, Horizontal merger guidelines
  • Case 27/62 United Brands v. Commission
  • Commission Notice on the definition of the relevant market for the purposes of Community Competition law
  • Eastman Kodak v. Image Technical Services

[edit] Abuse

Certain categories of abusive conduct are usually prohibited under the country's legislation, though the lists are seldom closed.[7] The main recognised categories follow.

[edit] Predatory pricing

Main article: Predatory pricing

Predatory pricing is a controversial issue. This is the practice of dropping prices of a product so much that in order one's smaller competitors cannot cover their costs and fall out of business. The Chicago School (economics) considers predatory pricing to be unlikely.[8] However in France Telecom SA v. Commission[9] a broadband internet company was forced to pay €10.35 million for dropping its prices below its own production costs. It had "no interest in applying such prices except that of eliminating competitors"[10] and was being crossed subsidised to capture the lion's share of a booming market.

Below cost
  • Brook Group Ltd. (Liggett) v. Brown & Williamson Tobacco Corp
  • C-62/86 AKZO Chemie BV v. Commission
  • 2001/354/EC of 20 March 2001 Deutsch Post AG
Above cost
  • T-24/93 Compaigne Maritime Belge Transport SA v. Commission
  • T-228/97 Irish Sugar plc v. Commission
  • United States v. AMR Corp

[edit] Tying

Main articles: Tying (commerce) and Product bundling

Tying one product into the sale of another can be considered abuse too, being restrictive of consumer choice and depriving competitors of outlets. This was the alleged case in Microsoft v. Commission[11] leading to an eventual fine of €497 million for including its Windows Media Player with the Microsoft Windows platform. A refusal to supply a facility which is essential for all businesses attempting to compete to use can constitute an abuse. One example was in a case involving a medical company named Commercial Solvents.[12] When it set up its own rival in the tuberculosis drugs market, Commercial Solvents were forced to continue supplying a company named Zoja with the raw materials for the drug. Zoja was the only market competitor, so without the court forcing supply, all competition would have been eliminated.

[edit] Limiting supply

Limiting production at a shipping port by refusing to raise expenditure and update technology could be abusive.[13]

[edit] Excessive pricing

Excessive or exploitative pricing means a business is directly setting prices at an exhorbitant level. It is difficult to prove at what point a dominant firm's prices become "exploitative" and this category of abuse is rarely found. In one case however, a French funeral service was found to have demanded exploitative prices, and this was justified on the basis that prices of funeral services outside the region could be compared.[14]

[edit] Price discrimination

Main article: Price discrimination

Price discrimination implies that a firm is unfairly discriminating between different customers in the price he or she sells at.[15] An example of this could be offering rebates to industrial customers who export your company's sugar, but not to Irish customers who are selling their goods in the same market as you are in.[16]

[edit] Refusal to supply

Main articles: Essential facilities doctrine and Refusal to deal
  • Otter Tail Power Company v. United States
  • Aspen Skiing Co. v. Aspen Highlands Skiing Corp.
  • Eastman Kodak v. Image Technical Services
  • Verizon Communications v. Law Offices of Curtis V. Trinko
  • C-6 and 7/73 Commercial Solvents and others v. Commission
  • C-241/91P and 242/91P Radio Telefís Éireann (RTÉ) v. Commission of the European Communities (Magill)
  • C-7/97 Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs und Zeitschriftsverlag GmbH & Co KG
  • C-418/01 IMS Health GmbH and Co. OHG v. NDC Health GmbH & Co. KG

[edit] Price Squeezes

  • Towns of Concord v. Boston Edison Co.
  • Commission Decision, 88/518/EEC of 18 July 1988 Case No. IV/30.178 Napier Brown, British Sugar
  • T-5/97 Industries Des Poudres Spheriques SA v. Commission

[edit] Causation and attempt

There is some debate about whether there needs to be a causal connection between the dominant position of a company and its actual abusive conduct.

  • C-333/94 P Tetra Pak v. Commission

Furthermore, there has been some consideration of what happens when a firm merely attempts to abuse its dominant position.

  • Lorrain Journal v. United States
  • United States v. American Airlines
  • Spectrum Sports v. McQuillan

[edit] See also

[edit] Notes

  1. ^ European Commission's Tenth Report on Competition, p.103, paragraph 150.
  2. ^ C-27/76 United Brands Continental BV v. Commission [1978] ECR 207
  3. ^ C-85/76 Hoffmann-La Roche & Co AG v. Commission [1979] ECR 461
  4. ^ AKZO [1991]
  5. ^ Michelin [1983]
  6. ^ BA/Virgin [2000] OJ L30/1
  7. ^ Continental Can [1973]
  8. ^ see, e.g. Posner (1998) p.332; "While it is possible to imagine cases in which predatory pricing would be a rational stragy, it should be apparent by now why confirmed cases of it are rare."
  9. ^ Case T-340/03 France Telecom SA v. Commission
  10. ^ AKZO [1991] para 71
  11. ^ Case T-201/04 Microsoft v. Commission Order, 22 December 2004
  12. ^ Commercial Solvents [1974]
  13. ^ Art. 82 (b) Porto di Genova [1991]
  14. ^ C-30/87 Corinne Bodson v. SA Pompes funèbres des régions libérées [1987] ECR 2479
  15. ^ in the EU under Article 82(2)c)
  16. ^ Irish Sugar [1999]

[edit] References

[edit] Further reading

  • Elhauge, Einer; Geradin, Damien (2007) Global Competition Law and Economics, ISBN 1841134651
  • Chalmers, Damien; Hadjiemmanuil, Christos; Monti, Giorgio; Tomkins, Adam (2006) European Union Law, ISBN 9780521527415

[edit] External links