Antitrust insights in a nutshell
SCD (Spirituous Clients Dpt.)
02. Dominant position
1 / 5
GLOSSARY
A firm is in a dominan...
Antitrust insights in a nutshell
SCD (Spirituous Clients Dpt.)
02. Dominant position
2 / 5
1. MARKET SHARES
Still today, m...
Antitrust insights in a nutshell
SCD (Spirituous Clients Dpt.)
02. Dominant position
3 / 5
2. CONSTRAINTS
Constraints impo...
Antitrust insights in a nutshell
SCD (Spirituous Clients Dpt.)
02. Dominant position
4 / 5
Buyer power may not, however, b...
Antitrust insights in a nutshell
SCD (Spirituous Clients Dpt.)
02. Dominant position
5 / 5
As the European Court has alrea...
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Antitrust IiaN - DOMINANT POSITION (EN)

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How to set a dominant position (criteria)

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Antitrust IiaN - DOMINANT POSITION (EN)

  1. 1. Antitrust insights in a nutshell SCD (Spirituous Clients Dpt.) 02. Dominant position 1 / 5 GLOSSARY A firm is in a dominant position if it has the ability to behave independently of its competitors, customers, suppliers and, ultimately, the final consumer 1 (for the purposes of article 102 TFUE). As far as Merger are concerned this time, dominant position had been defined as “a situation where one or more undertakings wield economic power which would enable them to prevent effective competition from being maintained in the relevant market by giving them the opportunity to act to a considerable extent independently of their competitors, their customers and ultimately, of consumers”2 Therefore, a dominant firm would hold such “MARKET POWER” if they have the ability or the opportunity to set prices above the competitive level3 , to sell products of an inferior quality or to reduce its rate of innovation below the level that would exist in a competitive market, for example. But, it is noteworthy to understand that under your national competition law (and also under European laws), it is not illegal to hold a dominant position, since this dominant position can be obtained or maintained by legitimate means of competition and most of time by merit power (please refer card Antitrust Insights in a Nutshell (AInaN) – abuse of a dominant Position # 1 & 2) PROBLEMATIC According to most of NCA and European case-law4 , holding a dominant position confers a special responsibility on the undertaking concerned. It is therefore incumbent upon you (and if you hold such a dominant position) to provide all the evidence necessary to demonstrate that the conduct concerned into the market is objectively justified. ASSESSMENT OF THE DOMINANCE It is difficult to translate into economic business terms the precise meaning of the legal expression “the ability to behave independently of its competitors, suppliers and, ultimately, the final consumers”. For example, and from an economic point of view, one would perhaps say that “behaving independently of competitors” might be formalised as a situation where you maximise your profits taking into account the best replies of your competitors (which simply best respond). But it is not legally enough and given this difficulty to translate this legal expression upon a firm, the assessment of dominance (or “market power”) will therefore rather use econometric techniques and above all will take into account the competitive structure of the market ; in particular the following main factors 5 : 1. MARKET SHARES & 2. CONSTRAINTS ON PRICING 1 This is not cumulative; means you can (of course) hold a dominant position vis-à-vis your customers but not at the same time vis-à-vis your suppliers. 2 E.g. Gencor Ltd vs. Commission (T-102/96), [1999], §200. 3 This has been indirectly recognised by the Commission: Cf. Christopher Jones & Francisco Enrique González Diaz, The EEC Merger Regulation, Colin Overbury, (Sweet & Maxwell – 1992), page 131. 4 Nederlandsche Banden Industrie Michelin (Michelin I) vs. Commission (322/81), [1983], §57: a dominant undertaking “[…] has a special responsibility not to allow its conduct to impair genuine undistorted competition on the common market”; Tetra Pak vs. Commission (Tetra Pak II) (T-83/91), [1993], §114; ITT Promedia vs. Commission Case (T-111/96), [1998], §139; Irish Sugar vs. Commission (T-228/97), [1999], §112; Michelin (Michelin II) vs. Commission (T-203/01), [2003], §97, etc. 5 It is noteworthy that for differentiated products as yours [wines & spirits] and among others, additional econometric techniques to asses market power are: * Elasticity of residual demand (asking by what % a price rise from firm would decrease its own residual demand – A low estimate of the residual demand elasticity would then suggest high market power of the aforesaid firm)… and sometimes, * Logit model demand. This latter is a discrete choice demand system used for example by the European Commission in TomTom/TeleAtlas (M. 4854) concentration notification and supposed to be easy to modelise due of huge data that would be in need for the calculation. To avoid such time, data researches and costs, this model integrate some restrictions and a priori (i.e. shortcuts) into the calculation of the model. Refer also footnote [19] in Kraft Foods / Cadbury (M. 5644) for short explantations and more recently Unilever/Sara Lee BC (M. 5658) – see also footnote # 6 hereunder. SUM-UP * IT IS NOT ILLEGAL TO HOLD A DOMINANT POSITION BUT IT CONFERS A SPECIAL RESPONSIBILITY. * ROUGHLY, YOU WILL FIND HEREUNDER CRITERIA TO DETERMINE AT FIRST SIGHT IF YOU HOLD A DOMINANT POSITION. * EVEN WITH A SMALL MARKET SHARE YOU CAN HAVE THIS SPECIAL RESPONSABILITY AND ADJOURN SOME BEHAVIOURS. Key Account Managers Sales… Managers Sales Forces Retail… Managers Team Leaders Category… Managers Procurement Purchasing… Managers Buyers Marketing… Manager Advertising…Sales Media Planner Project… Manager Finance Managers Legal Advisers Auditors
  2. 2. Antitrust insights in a nutshell SCD (Spirituous Clients Dpt.) 02. Dominant position 2 / 5 1. MARKET SHARES Still today, market shares provide a very useful first indication for your NCA or ECA of the market structure and of the relative importance of the various undertakings active on the market. However, your NCA will always interpret these market shares criterium in the light of the relevant market conditions, and in particular of the dynamics of the market and of the extent to which products are differentiated6 . The trend or development of market shares over time may also be taken into account in volatile or bidding markets. Indeed, experience suggests that the higher the market share and the longer the period of time over which it is held, the more likely it is that it constitutes an important preliminary indication of the existence of a dominant position and, in certain circumstances, of possible serious effects of abusive conduct, justifying an intervention by your NCA under Article 102 TFUE or national equivalent. However, and as a general rule, your NCA will not come to a final conclusion as to whether or not a case should be pursued without examining all the factors which may be sufficient to constrain the behaviour of the undertaking (see point 2. hereunder) - Thresholds? At this stage, European case-law has made clear that a firm with 40% of the market shares of a relevant market might well be a dominant one. The threshold of 40% comes from one of the early cases of abuse of a dominant position7 and is still considered by your NCA and ECA as a relevant threshold for the purpose of the determination of dominance; although, once again, the market share possessed by a firm is neither a necessary nor a sufficient condition to prove its dominance.8 Then, and according to the criterium mentioned hereabove, there may be specific cases below the threshold referred of 40% where competitors are not in a position to constrain effectively the conduct of a dominant undertaking, for example where they face serious capacity limitations (example you brand [XX] in Champagne). Such cases will also deserve attention on the part of your NCA. It is the reason why you can perfectly hold a dominant position and a market power with only 30% of market shares of a relevant market if other condition allow you the power “to behave independently” of your competitors or retailers. We therefore estimate that 30% of market share is telltale of a dominance power into your markets (especially in […] where buyer power […] is weaker than in […] for example). - Volume or Value? The latter generally have more economic meaning, although the former might contain some additional information about the relative market positions. For example, in Nestlé/Perrier9 , the European Commission calculated market shares in the French mineral water industry (the relevant product market) both in volumes and in values. The three major firms held higher shares when total values were considered, indicating that consumers were wiling to pay higher prices for a bottle of their water than for that of competitors. Considering some of your branded products [X, Y & Z] the transposition can be very same. Please refer to CT* card # […] and CT* Excel sheet # […] giving instructions about threshold limits and volume/value considerations for each brand of your company. Market share is not the only criterium to determine if you hold a dominant position… 6 According to economics literature and antitrust laws, if products are viewed as identical by consumers this is homogeneous or undifferentiated products; but in your industry [wines & spirits] products are sometimes typically heterogeneous or differentiated (means that consumers consider products or brands of various firms to be imperfect substitutes) (typically your brands [X], [Y] and under the brand umbrella and [Z] for example). It is still noteworthy in this regard that according to economics, large advertising expenditures you sustained for your brands last years explained why some products can be perceived by consumers as very differentiated from each other (it is moreover one of the main goal of advertising). Please remember the CT* training - “S.O.V & antitrust law” you heard as a free listener with your marketing representatives about SOV of brand [X] and [Z] on date […] ! 7 United Brands Company & United Brands Continentaal Bv vs. Commission (27/76), [1978]. 8 In the American Alcoa well-known opinion, Judge Hand said that “a 33% market share was insufficient to find monopoly power, 66% was possible though doubtful, and 90% or more was sufficient”. 9 M.190 – Nestlé/Perrier –[1992]
  3. 3. Antitrust insights in a nutshell SCD (Spirituous Clients Dpt.) 02. Dominant position 3 / 5 2. CONSTRAINTS Constraints imposed by the credible threat of future expansion by actual competitors or entry by potential competitors (expansion and entry), AND constraints imposed by the bargaining strength of your customers (countervailing buyer power) are more criteria. - Expansion or entry Competition is a dynamic process and an assessment of the competitive constraints on an undertaking cannot be based solely on the existing market situation. The potential impact of expansion by actual competitors or entry by potential competitors10 , including the threat of such expansion or entry, is also relevant for the determination whether you hold or not a dominant position. An undertaking can be deterred from increasing prices (and then to hold a serious dominant position) if expansion or entry is likely, timely and sufficient. For your NCA to consider expansion or entry likely it must be sufficiently profitable for your competitors or new entrants, taking into account factors such as the barriers to expansion or entry, the likely reactions of the allegedly dominant undertaking and other competitors, and the risks and costs11 of failure. For expansion or entry to be considered timely, it must be sufficiently swift to deter or defeat the exercise of substantial market power. Usually, this means that entry has to occur within a short period, for example, a period of maximum one year or two (depending of the products – see also our special card # […] about “Wine for laying down” market). For expansion or entry to be considered sufficient, it cannot be simply small-scale entry, for example into some market niche (your brand [YY]), but must be of such a magnitude as to be able to deter any attempt to increase prices by the putatively dominant undertaking in the relevant market. - Countervailing buyer power Competitive constraints may be exerted not only by actual or potential competitors (as mentioned hereabove) but also by your customers. Even an undertaking with a high market share may not be able to act to an appreciable extent independently of customers with sufficient bargaining strength. Such countervailing buying power may result from your customers' size or their commercial significance for the dominant undertaking, and their ability to switch quickly to competing suppliers, to promote new entry or to vertically integrate, and to credibly threaten to do so12 . 10 A firm is treated as a potential competitor if there is evidence that this firm could and would be likely to undertake the necessary additional investments or other necessary switching costs to enter the relevant market in response to a small and permanent increase in prices (SSNIP test already mentioned before; please refer card AIiaN - 01.Relevant market) from incumbent firms (i.e. already in the aforesaid market like you). We have seen that your brand [XX] in Champagne might not be challenged easily by potential competitors given the specificity of the “Climats” in this area… it would have been the same rationale for Bourgogne “Climats” for example (means AOC controls & INAO delimitations). On the other hand your brand [Y] can easily be “victim” of an entry by a potential competitors because it is more easy to enter given the relative absence of limits for the AOC. For more precisions please also refer card AIiaN – 00.antitrust definitions. 11 For example, FIXED SUNK COSTS are roughly: *Exogenous sunk costs which refer to the investment a firm has to incur in order to endow itself with the plants and machines (or, more generally, technology) it needs for producing and distributing the good (Please refer to CT* Excel sheet # […] giving details about sunk costs to be taken into account for each of your brands) and *Endogenous sunk costs refer to R&D and advertising outlays that firms make in order to increase the perceived quality of their products ( in your sector mainly […] and […] ), and they are indeed a choice variable for the firm good (Please refer to CT* Excel sheet # […] giving R&D & Ads costs to be count up for each brands). 12 Indeed, the ability of a firm to charge high prices (1.) also depends on the degree of concentration of the aforesaid buyers. A firm is clearly freer to exert MARKET POWER if it faces a large number of dispersed consumers or buyers (for all your brands mainly than if it faces one or a few strong buyers (in your case Hyper & Supermarkets via referencing centers). One of the ways (but not the exclusive’s one) to calculate the degree of concentration in a relevant market is called “HHI index”. The HHI index sums the squares of the individual market shares of all buyers; thereby giving proportionately greater weight to the market shares of the larger firms, in line with their relative importance in the competitive process. Please refer card AIiaN – 00.antitrust definitions. The second reason why such calculation might be interesting (with “deterring if a firm is able to charge high prices”) is to feel the probability of entries to occur (2.).
  4. 4. Antitrust insights in a nutshell SCD (Spirituous Clients Dpt.) 02. Dominant position 4 / 5 Buyer power may not, however, be considered a sufficiently effective constraint if it only ensures that a particular or limited segment of customers is shielded from the market power of the dominant undertaking!13 Last but not least, existence of Private Labels (or “MDD”) in the product market can also be a clue of Buyer power; this is mostly the case for brands [A], [B] or for example [C] of your clients buyers [1.], [2.] or [3.] in wines market. 3. ELASTICITY OF DEMAND AND SUPPLY - The greater is the market demand elasticity, the greater will be the elasticity of demand facing the individual firm, and the smaller will be the individual firm’s market power14 AND - The larger is the fringe supply elasticity, the larger is the elasticity of demand facing the individual firm, and the smaller will be the firm’s market power. 4. PROFIT MARGINS We understand easily the idea: the more the profit margins of an undertaking, the more the probability to face a dominant position. This latter, however, is not bullet-proof because we speak here about genuine “economic profits” and not (that is more easy to calculate and to have as information) “accounting profits” which is usually misleading in determining any market power15 . Take care of this point ! Indeed, Economic profits are generally less than Accounting profits because economic profits are equal to accounting profits less compensation for risk-taking and the “nonaccounted” market value of resources used in production. Last but not least, such method can be victim of the said “Cellophane Fallacy” already mentioned in the 01.Relevant market CT* card. Disappointment with these two last approaches has led to propose more direct and supplementary methods aim to get directly at some assessment of a firm’s ability to raise price without being constrained by competitors16 . The last one is then the Lerner Index. 5. LERNER INDEX The Lerner index (Li) is equal to: (P-MC) / P 17 But, here again, it is pretty hard to measure marginal costs18 at the end of the day even if in your company manage cost accounting ; which is a form of accounting which permit such calculations contrary to others. COLLECTIVE DOMINANCE Be finally aware that a dominant position may also be enjoyed jointly by two or more independent economic entities united by economic links in a specific market or thanks to market structures. This situation is called collective (or joint or oligopolistic) dominance. 13 Therefore, and for example, having a chain’s buyer power into […] market is not bullet-proof according to the fact that, for example, the market share (and so power) of these later represent perhaps a small part of the buyer market (and thus of the buyer power). 14 Remember, this point was discussed for [Z] brand when we have calculated together its demand and supply elasticities thanks to AC Nielsen wine sales data among others. 15 This had been expressly recognised by the European Commission itself in note 7 under § 11 of the Guidance mentioned hereabove and by the European Court of Justice in case United Brands (§ 126) mentioned note #8 hereabove. 16 You can also see my french Antitrust Point of View « Antitrust PoV - PROFITS & POUVOIR DE MARCHE (FR) » – under SlideShare 17 P = Price & MC = Marginal Costs. 18 Even if usually, MC = ΔC(Q) / Q. Please refer to CT* DIY/DWO © training - “DIY ECONOMICS – do without economists” # […] on date […].
  5. 5. Antitrust insights in a nutshell SCD (Spirituous Clients Dpt.) 02. Dominant position 5 / 5 As the European Court has already ruled in the Gencor case-law for example, there is no reason, in legal or economic terms, to exclude from the notion of economic links the relationship of interdependence existing between the parties to a tight oligopoly within which those parties are in a position to anticipate each one another’s behaviour and are therefore strongly encouraged to align their conduct in the market. This is an important point because you have to remember what had been written at the second paragraph of the current card (concerning the Tetra-Laval case-law) in case of any collective dominance : you may find themselves entrusted with the “special responsibility” (and then adjourn some business behaviour you were likely to have)… even if you do not hold a dominant into your relevant market19 . For a narrower assessment of whether you hold a collective dominance, please refer to your antitrust general counsel or roughly to the Airtours/First Choice20 criteria. 19 John Temple Lang, Oligopolies & Joint dominance in Community Antitrust Law, 2001: “If joint dominance is proved, each company is subject to substantially the same kind of duties under article 82 as in the case of single dominance. One jointly dominant company can commit an abuse which is contrary to Article 82 even if the others do not”. See also 32nd Report of the House of Lords Select Committee on the European Union, HL Paper 165, session 2001-02, § 153: “The increasingly broad interpretation of the concept of collective dominance under the existing [Merger Regulation] is, therefore, placing numbers of undertakings under a special responsibility under Article 82 even if they themselves hold a relatively small market share, since they have been found to be in a position of collective dominance”. 20 Airtours plc vs. Commission (T-342/99), [2002]

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