# Presentation: 064589

## The dominance concept:new wine in old bottles

- Miguel de la Mano*
- Member of the Chief Economist’s Office
- DG COMP, European Commission

- FTC/DOJ Hearings on Single-Firm conduct
- Washington DC, 07 March 2007

- *The views expressed are those of the author and do not necessarily reflect those of DG COMP or the European Commission

## Dominance as a necessary condition

- The EU treaty prohibits single-firm conduct that harms consumers only when undertaken by dominant companies (Article 82).
- Possible reasons:
- Provide legal certainty
- Impose discipline on the EU Commission
- It didn’t fully worked because:
- The concept of dominance is somewhat elusive
- It became increasingly difficult to define dominance
- Ultimately proof of dominance was almost sufficient to establish an abuse (the special responsibility doctrine)

## 1. Dominance ≡ Substantial Market power

- All firms have some market power, though most have very little.
- Accordingly, the relevant question in antitrust cases is not whether market power is present, but whether it is important (i.e. substantial).
- European Court of Justice (1978) defines dominance as the:
*	**“...**power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.”*
- That is, a firm is dominant if its decisions are fairly insensitive to reactions of competitors and customers
- Elasticities are a measure of this (in)sensitivity and of market power
- behave independently _to an appreciable_ extent
- ≡
- ability to _significantly_ and profitably and durably increase prices

## 2. Factors that determine if a firm has substantial market power

- Significant2 market shares
- Barriers to entry and expansion (in the absence of the conduct)
- No technological leapfrogging
- Lack of countervailing buyer power.
- 	The acid test:
- is the firm the _most efficient_ in the market?

## 3. Dominance is only a screen

- If a practice is shown to be anti-competitive the firm must be dominant
- But proving that a practice is anti-competitive is hard and takes time. This requires scarce resources and reduces legal certainty
- Further, large players may not be dominant
- innovation is taking place at a rapid pace
- there is fierce competition between large players
- strong disciplining by potential entrants or customers
- A dominant firm (if merger control is effective) normally has lower costs or sells superior products.

## Non-hypothetical example

- The EU Commission recently reviewed a complain where:
-  defendant had high market shares in a homogenous good market (above 60%)
- Important barriers to entry could be identified: large overcapacity, declining demand, high fixed costs to establish new facilities, strong learning effects
- Extensive use of long term contracts and thus limited customer switching
- Defendant had the broadest product and technological range and the largest financial resources.

- The EU Commission concluded the defendant was _not dominant_ because:
- Buyer concentration (top 3 customers take 70%)
- Product homogeneity allows to switch supplier without incurring significant switching costs
- Buyers have dual sourcing strategy and shift volumes between suppliers
- Rival suppliers have overcapacity
- Competition mechanism: bidding for large occasional contracts

## Careful use of market shares

- The use of market shares is often advocated:
- To set up a bright line safe harbour
- To allow for an implicit safe harbour for non-leaders
- Bright-line safe-harbours make sense but the threshold should not be placed too high. The “non-leader” safe harbour makes no economic sense. Examples:
- Rivals are constrained (e.g. electricity industry)
- Strong multi-market presence (e.g. airline industry)
- Market leader are more constrained by regulation than non-leaders (e.g. telecoms)
- Leader may be more constrained by close substitutes or by new entry (e.g. pharma)
- Policy justifications:
- Consistency with unilateral effects in merger control
- Leave open the door to “attempted monopolisation”

## A remark on market delineation

- The EU Notice explicitly adopts the Hypothetical Monopoly Test (HMT) to delineate market boundaries for mergers, agreements and single-firm conduct
- The HMT is a useful conceptual tool to identify competitors constraining the defendant
- The assessment of dominance serves the same purpose but takes it one step further: how much is the defendant constrained?
- Often, market definition will be a by-product of the dominance assessment.
- This reflects that market definition is only a means to an end. The real issue of interest is market power.