Antitrust offences and market power
Firms affect CW when they hold market power. Therefore, Antitrust Law focuses on:
- Monopolistic Conduct, it presupposes the existence of a significant amount of market power.
- Agreements, entails the aggregation of market power.
- Mergers, entails the aggregation of market power.
What is market power?
- A firm holds market power when it is able to increase its price above the market price (=marginal cost) in a profitable way over a period of time. This happens when the profit lost due to the loss of sales is lower than the profit gain due to the price increase.
- Thus, the notion of market power is very technical and must be distinguished from that power, which is much broader.
Market Shares
Antitrust authorities use a proxy to appreciate market power ... Market Shares ... Because there is a positive correlation between market power and market shares, and to calculate market shares, we need to define the relevant market.
The Notion of Relevant Market
Market definition is a tool to establish who competes against whom.
In other words, it aims at identifying the actual competitors of the undertakings under scrutiny to understand whether the behaviour of the latter are actually constrained by the conduct of the former.
Antitrust enforcers are used to distinguishing:
- The product market, which comprises all those products and/or services that can be regarded as substitutable. Antitrust enforcers assess interchangeability looking at what economists call "substitution of demand" and "substitution of supply".
- The geographical market, which comprises the area where the firms in question act under sufficiently homogeneous conditions (e.g., understand if geography limits some customers' willingness or ability to substitute to some products, or some suppliers' willingness or ability to serve some customers).
Thus, Antitrust authorities firstly define the relevant market and then:
- Calculate the market share of the firm(s) under scrutiny
- Calculate the market share of its rivals
- Assess the bargaining power of its clients and suppliers
- Consider the barriers to entry (natural, legal and strategic).
Barriers to Entry
- Natural, barriers inherent to the structure of the market, such as sunk costs and network effects.
- Legal - Administrative, barriers coming from the public order, such as legal requirements or exclusive rights.
- Strategic, barriers resulting from previous firms' behaviors, such as advertising campaigns creating reputation, or range strategies pre-empting rivals.
Dominant Position
Market Shares and Market Power
- In Hilti (1994) and Tetra Pak II (1996) citing Hoffmann La Roche, the ECJ held that market shares respectively of 70-80% and 90% were themselves evidence of a dominant position. But barrier to entry were very high.
- In AKZO (1991) a 50% share of the market was considered giving dominance: with the 50% of the market there is a presumption of dominance.
- Further factors to assess market power: - Indications from the undertaking itself (i.e.: AKZO regarded itslef as the world leader in the peroxides market); profits (if the undertaking is earning monopoly profits); overall size and strenght of range of products (portfolio power).
Remember, if a market presents natural barriers (i.e., networks effects, sunk costs) or legal barriers (IPRs), antitrust law cannot intervene on those barriers. Antitrust law can intervene against strategic barrier if those practices harm the well-functioning of the market without producing any redeeming virtue, that is: without producing efficiencies.
Antitrust: key-points to remember until now
- Antitrust Rationale.
- Market Definition.
- Agreements.
- Dominance and Abuse.
- Mergers.
Antitrust has not to be confused with:
- Consumer Protection.
- Unfair Commercial Practices.
- Regulation (in general).
The goal of antitrust (or competition law) is to protect competition in the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources. While:
- Consumer Protection, Consumer policy of the European Union aims to maximize consumer participation and trust in the market. Example: the Directive 2011/83/EU extends the withdrawal period for consumers to 14 calendar days.
- Unfair Commercial Practices, Regulation on unfair business practices, part of European consumer law. Example: Rules on misleading advertising and aggressive sales practices.
- Regulation:
- Antitrust law does not intervene on the competition conditions.
- Antitrust law takes the market as it is.
- The one that changes market conditions is the 'regulator'.
As we already said, antitrust law focus on firms' practices harming the well-functioning of the market. Thus, Antitrust law protects actual/real competition: it does not work to recreate perfect competition. It does not have to reproduce the hypothesis of the perfect competition model by remedying to the many imperfections (such as scale economies, externalities, barriers to entry, information asymmetries) that characterize actual/real markets. This last is a job for economic regulators.
On the one hand, if for any reason the initial state of the market is E', antitrust law is not supposed to drive the market back, toward E*.