Abuse of Dominance:

Relevant markets and market power

Jennifer Skilbeck12th January 2006

for VCAD

Market definition

The law: a relevant market comprises products and services that are

“…interchangeable in terms of characteristics,use,prices.”

(Article 3(1))

Guidance (1) Advice provided by VCAD (draft Policy Brief)

(2) Further assistance may be obtained from other competition authorities’ websites, eg European Commission, Hong Kong, Singapore, UK, Jersey, Australia, which have broadly similar provisions.

(3) Most recent thoughts on relevant principles: European Commission: Discussion Paper on Article 82

Outline of the talk

1. Product and geographic market generally

2. Product market1. Demand side2. Supply side

3. Some specific tools for market definition1. Elasticities2. SSNIP test & cellophane fallacy

4. Geographic market5. General observations and examples6. Dominance

1. Measurement2. Barriers to entry3. Buyer power

1. The “relevant market”

• Product market eg electricity for domestic

consumption, electricity for industrial consumption, laptop computers

• Geographic market eg “the world”, Vietnam, Quang

Binh, Dong Hoi

Each case must be considered individually:

• The product market must be considered according to:

• Demand side substitutability• Supply side substitutability

2(1).Product market definition: demand side

EXAMPLE:

• There is one supplier of a particular new pharmaceutical product for headaches. Is it in the same market as other headache remedies?

• If the supplier raises his price and he loses significant sales to older products, that supplier is probably not in a market of his own, so…

… product market definition:demand side

• …it is necessary to widen the market definition to include the older remedies.

• Then ask, if all those suppliers together raised their prices would they lose significant sales?

• If “yes” then there may be further substitutes. If “no” then the market has been defined.

2(2). Supply side market definition (1)

• In practice consideration of the supply side rarely adds anything to the analysis.

• Sometimes the relevant market may be wider than defined by demand substitution through supply substitution: an example…

Supply side market definition (2): example

• Still mineral water may be in a different market from sparkling water from the demand side, but manufacturers can easily produce both, so manufacturers of still water only

could not raise prices, even if there was no substitute for the consumer.

So still and sparkling water are both in the same market.

3. “Tools” of market definition

• There are some obvious methods, based on Usual conventional market

definitions Consumer surveys Observations made by the alleged

dominant firm Miscellaneous market research

“Tools” of market definition (2)

• There are techniques for measuring substitutability: difficult to apply, but, at least.. may inform thinking

• It is best to use a variety of approaches

3(1)Tools: measuring elasticity

• “Elasticity”: the percentage change in demand following a specified percentage change in price

• “Cross-elasticity”: the percentage change in demand following a percentage change in the price of another product eg gas and electricity, mobile phones and fixed lines

Elasticity (continued)

• If there is a large change in demand from a specified change in price demand is “elastic”

• If a small change it is “inelastic”

Elasticity and substitutability

• The VCAD policy brief (draft): A product is not substitutable if a price rise of 10% results in a loss of demand of 50%

• Other jurisdictions may have other guidelines

Applying the VCAD guideline to the headache remedy:

• Consider the effect of a 10% price rise in the new product.

• If less than 50% of consumers would move to other products, then it is in a market of its own

• If more than 50% would move it is in the same market as the other remedies

• Products in the same market will have high cross-elasticities.

3(2) The SSNIP test

“A small but significant non-transitory increase in price”

• This is simply a way of formalising the test for substitutability: can the supplier profitably increase price by a “SSNIP”, usually, 5%?

• If “yes”, then the supplier is in a market of its own because there is not enough price elasticity

SSNIP and VCAD

• So, the VCAD suggests a SSNIP test for (demand side) market definition based on a 10% increase in price leading to a change in demand of 50%

The “cellophane fallacy”

• The SSNIP exercise can only be carried out hypothetically, because

If the firm is dominant it will already have raised prices until the point where a further price increase will be unprofitable. It will wrongly suggest substituability.

(it is called “cellophane” because of a US case concerning cellophane cooking paper).

The “real” SSNIP test

• Would the supplier be able to sustain a price (5%) above the competitive level?

• That cannot be tested from actual observation

4. The geographic market (1)

• The geographic market definition is usually obvious. The same principles of substitutability apply:

eg if a Hanoi local newspaper raised its price, the consumer would not choose to buy the Ho Chi Minh local paper instead, but…

The geographic market (2): example

• If a manufacturer of electronic goods in Vietnam raised its prices, distributors would look to suppliers overseas, but

• A consumer buying the same goods would operate in a smaller geographic market

5. Market definition: some general observations (1)

• The market definition will be different depending upon the precise issue, in particular whether buyers are consumers or intermediate purchasers.

• The market definition is ultimately a matter of judgment.

• It is generally unavoidable to begin with an “intelligent appraisal” and then consider the appropriate tools

Market definition: some general observations (2)

As a result:

• Abuse of dominance is very difficult to prove

• There are very few cases compared with “unlawful agreements”

Some examples (1):

• State-owned utilities (obviously)• Intellectual property, eg

pharmaceuticals protected by patents

• Compatibility issues, eg Microsoft, video and DVD technology, where one technology is bound to “win”

Some examples (2):

• Historical development: Michelin built a tyre monopoly through discounts available only if distributors bought their entire needs from Michelin

• Other cases, eg crematoria have small local markets, and, typically, other consumer services (newspapers, medical services)

6 (1). Dominance (market power)

• Once the relevant market has been defined, the question is, is the firm “dominant”?

• Vietnam law provides a definition based on: market share above 30% or “capable of restricting

competition considerably” (Article 11(1))

Practical consequences

• It is unlikely that a firm with a market share of less than 30% will have “market power”. This is an unusually low legal threshold

• One possibility: the other 70% each have very small market shares

Other tests for market power

• Elasticities: very inelastic demand suggests market power

• Market behaviour: eg unfair trading terms, price discrimination

6(2). Barriers to entry

Low entry barriers and therfore low market power if:

• short product life, • low start-up costs, • absence of legal barriers, • good enforcement of

competition law (!)

6(3) Buyer power

• Eg producers of fertilizers will have significant “buyer power” in purchasing the chemicals, preventing too much market power by chemical manufacturers, but

• The individual farmer will have no “buyer power” when it purchases the fertilizer.

Final observations (1)

• If the answer to your careful analysis does not accord with common sense, look again at your market definition!

Final observations (2)

• It is not unlawful to hold a dominant position,

• It is only unlawful to abuse it!

Thank You

For more informationwww.monckton.com

andjskilbeck@monckton.com