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Competition Law Toolkit : Key Concepts and Tools
C. Key Indicators of Market PowerMarket definition is not an end in itself; it is a means to an end. Having defined the relevant product and geographical markets, it is then necessary to determine whether a firm or firms have power over those markets. There are a number of stages in determining whether market power exists; market share figures are, of course, important. However, they cannot be decisive in themselves. A number of other factors are relevant when assessing whether there is market power, including barriers to entry, barriers to exit, buyer power, and various other factors.
Market share figures are, of course, relevant to any assessment of market power. The higher the market share, the more likely it is that a firm will be found to have market power. Many legal systems have threshold figures which raise a presumption of dominance: this is the case in the European Union, where dominance is presumed at a market share figure of 50%. However, this is a rebuttable presumption. Some systems of law have adopted a different threshold figure which, in some cases, is lower than 50%. However, it is extremely important to bear in mind that market share figures cannot, in themselves, provide a conclusive answer to the question of market power, because they say nothing about competitive constraints from outside the market. In particular, market share figures tell us nothing about
In determining whether a firm has market power, it is not simply market share that is relevant: a large market share may quickly be whittled away if a firm makes excessive profits in an industry, resulting in the entrance of other firms in the market.
However, the idea that it is difficult to enter a market is very different from it being impossible to do so. There has been much debate as to the appropriate definition of a barrier to entry for competition law purposes. It is obvious that legal provisions such as licensing laws and intellectual property rights conferring a legal monopoly can act as barriers to entry; so might the advantage of scale and anti-competitive practices designed to deter new entrants to the market. After this, the consensus tends to break down. Some economists regard the superior efficiency of a dominant firm, its technological know-how, the cost of advertising, product differentiation, and the difficulty of gaining access to risk capital as barriers. Much of this has been questioned, however. In particular, it has been suggested that a barrier to entry means "a cost... which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry"1. According to this view, there must be some asymmetry between the position of firms already in the market and newcomers. It would follow that the cost of advertising is not in itself a barrier: the existing firm had to invest in the promotion of its product and the new one will not face a higher cost. There could be a barrier, however, where the advertising has created a high degree of brand loyalty. Similarly, access to capital might be a problem in the sense that the money markets are inefficient, but this is equally true for any borrower. The tendency of the European Commission and the Community Courts in applying Article 82 of the EC Treaty has been to adopt a wide approach to barriers to entry. As a consequence, many firms have been found to be in a dominant position, even when their market shares fell considerably short of 100%. In the UK, OFT's guideline on the Assessment of Market Power [ PDF ] provides detailed guidance on how this issue will be handled under the Competition Act 1998, and is in many respects more principled and illuminating than the position under Article 82. In particular, this guideline identifies three types of barriers to entry: absolute advantages, strategic advantages that follow from being the "first-mover" in the market, and exclusionary behavior. Further guidance can be found in OFT's guidance on the substantive assessment of mergers [ PDF ] and in the Competition Commission's guidelines on Merger References [ PDF ].
Barriers to exit are also significant when considering market power. A person who finds it difficult to leave the market in which he or she operates—e.g., one who owns assets that are not easily adapted to other uses—will be more susceptible to exploitation by a powerful supplier. In perfectly competitive markets, resources can move freely from one part of the economy to another. A barrier to exit is actually a barrier to entry, in the sense that high sunk costs that cannot be retrieved on exit act as a disincentive to enter. Market power is not solely a supply-side phenomenon; buyers may also exercise market power. A buyer may exercise market power by paying for a product below the competitive level, thus limiting the supplier's output. For instance, in a "monopsony," where a single buyer accounts for the entire demand in a market, its behavior may be just as detrimental to social and consumer welfare as that of a monopolist. This does not mean that buyer power is always socially undesirable. There may be markets where having a single buyer is the most efficient way of procuring a product. Alternatively, buyers may collaborate in a purchasing organization in order to exercise buyer power and counterbalance the bargaining strength of suppliers. The European Commission's Guidelines on the Appraisal of Horizontal Mergers [ PDF ] recognizes the importance of countervailing buyer power as a potentially effective constraint when determining whether a merger will impede effective competition; as do OFT's guidelines on the substantive assessment of mergers, and the Competition Commission's guidelines on mergers and market investigations.
This section of the toolkit has discussed the concept of market power. However, many systems of competition law, as well as systems of ex ante regulation, refer to significant market power, or to firms that have a dominant position. More specifically, there is a tendency for the expressions, "significant market power" and "dominant position" to be regarded as interchangeable. This is explicitly so in the case of the EU legislation on electronic communications (Article 14, Directive 2002/21/EC, 7 March 2002 on a common regulatory framework for electronic communications networks and services [ PDF ]).
Profitability [ PDF ] and exclusionary power [ PDF ] may play an important role in analyzing the presence or absence or market power. SummaryThe key features involved in determining whether a firm or firms have market power have been explained, particularly that:
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