panel ii criteria used to assess the durability of market power
TRANSCRIPT
PANEL IIPANEL II
Criteria Used to Assess The Durability of
Market Power
Durability of Dominance and Identifying Entry Barriers and
Competitive Effects in Practice
ICN Unilateral Conduct Workshop, Panel II, Washington DC
March 23, 2009
Presented through a not-so-scenic tour of Jersey, Channel Islands
-Assume the presence of a dominant firm making monopoly profits
Classic Economic Theory: Entry restores effective competition
Key Question:Will it happen in practice?
The Costs of Entry (I)
EstablishmentAccess to Labor/Expertise
Access to Capital
•Capital Investments
•Sunk Costs?
Facilities
The Costs of Entry (II)
• Potential bottlenecks
• Supply Chain
• Access to Markets
Legal Considerations
National Laws
Potentially, Sector Regulation
PATENTS (JERSEY)
LAW 1957
PLANNING AND
BUILDING (JERSEY) LAW 2002
CUSTOMS AND
EXCISE (JERSEY) LAW 1999
Incumbents
• Network Effects?
• Legacy of State ownership?
• Vertical Integration?
• Reputation of incumbents?
Customers/Consumers
• Barriers to Switching?
• Search Costs?
• Preferences?
?
Ultimately: Will New Competition Restore a Competitive Market?
For the Potential New Entrant:
Is there a profitable business case?
For the Competition Law Enforcement Agency:
Entry timely, likely, sufficient?
Other market factors relevant?
Is dominance entrenched?
Panel II Speakers• Dr. Simon Roberts
– Chief Economist and Manager, Policy and Research Division, Competition Commission South Africa
• Jacques Steenbergen– Director General, Belgian Competition Authority
• Ronald A. Stern– Vice President & Senior Competition Counsel,
General Electric Company • Charles Webb
– Executive Director, Jersey Competition Regulatory Authority
Belgian Competition Authority Directorate General
Durability of dominance
Jacques Steenbergendirector general
ICN Unilateral conduct workshop – Panel II
Washington DC, March 23, 2009
Durability of dominance: an ambiguous issue
• Durability is a specific concern in case it increases the risk of abuse:– Exclusionary practices– Exploitative abuses– Discrimination
• Durability is also a specific concern when it is the result and/or evidence of abusive practices that aimed at the strengthening of a dominant position
• Durability of dominance makes abuses more serious and exclusionary abuses are in turn likely to enhance durability: it is an element of assessment/evidence
Belgian Competition Authority Directorate General
Durability of dominance: an ambiguous issue (2)
• But durability is as such not a constitutive element of an infringement of the rules of competition, just as dominance does as such not constitute an infringement
• Because of an ambiguous attitude to dominance, we inevitably also have an ambiguous attitude to its durability
• And we can not exclude that durability mainly points to consistent competitive success
• It must be assessed in the context of the assessment of dominance and abuse
Belgian Competition Authority Directorate General
Assessment of durability
• Assessment of dominance: see best practices• Assessment of durability: mainly assessment of barriers
to entry (see presentation of Chuck Webb)
• Assessment of the causes of durability: only relevant to the extent that:– Durability is a specific concern– The causes need to be addressed as such regardless of the
specificities of the unilateral conduct case: evaluation of the regulatory environment and state action
Belgian Competition Authority Directorate General
Durability of dominance and liberalization: the case of incumbents
• The (former) monopolists can only lose market share: are they (still) dominant?
• Sunk costs and written-of investments• The technology timeline• Price squeezes: caught between consumer welfare and
competitor protection?• The unilateral conduct equivalent of sticky pricing?(See further the presentation of Simon Roberts)
Belgian Competition Authority Directorate General
ICN Unilateral Conduct Workshop
“Assessing Whether A Firm is Dominant – The Role of Other Market Criteria”
Ronald A. SternVice President & Senior Competition Counsel
General Electric CompanyMarch 23, 2009
ICN Workshop Other Market Criteria
GE Honeywell
Rolls Royce
Pratt & Whitney
1. Overall Installed Base 40-50% 40-50% 0-10% 0%
2. Installed Base of Aircraft in Production
60-70% 30-40% 0% 0%
3. Order Backlog on Aircraft Not Yet in Service
90-100% 0-10% 0% 0%
Engines for Large Regional Jets (70-90+ Passengers)
“Prior to the transaction, GE was alreadydominant in this market.”
ICN Workshop Other Market Criteria
• How Does the Relevant Market Operate?
• Powerful Buyer – Aircraft manufacturer
• Winner-take-all Bidding – 1 engine selected
• Pricing “Locked-In” by contract for the life of the aircraft program
Key Issue – Were there credible bidders whenthe engine supplier was selected?
ICN Workshop Other Market Criteria
Key Large Regional Jet Engine Competitions1
Engines Considered
Aircraft Timing GEE PW RR SPW2 CFM3
CRJ 700 1994 CF34-8C1* NO NO NO NO
AI(R) 70/844 1996-1997 CF34-8 NO RR BR 710 SPW14* NO
728 J ET4 1997-1998 CF34-8D* NO RR BR 710 SPW14/16 NO
ERJ 170/190 1998-1999 CF34-8E/10E*
NO RR BR 710 SPW14/16 NO
BRJ -X5 1999-2000 No PW6000 RR BR 710 NO CFM56-9
*Engine selected by aircraft manufacturer 1 Two-engine aircraft 2 PW/Snecma J oint Venture 3 GE/Snecma J oint Venture 4Program cancelled after engine selection (728 J ET program was cancelled in 2002) 5 Program cancelled before engine selection
ICN Workshop Other Market Criteria
• Existence of Credible Bidders• Multiple engine firms competed for large regional jet
opportunities – GE or CFM; RR; SPW or PW• RR and PW each had a track record of success in
commercial aircraft engines generally and in adjacent markets (small regional jets; 100-120 seat large commercial aircraft)
• SPW JV won one of the large regional jet engine competitions
Dominance/substantial market powerunlikely despite extremely large market share
ICN Workshop Other Market Criteria
• What Has Happened Since 2001?• PW continued to invest in innovative geared fan
technology• Snecma continued to pursue regional jet engine
opportunities separate from PW• Three new large regional jet programs launched:
1. China Regional Jet (ARJ121) – GE engine2. Russian Regional Jet (SSJ100) – Snecma/Saturn JV
engine3. Mitsubishi Regional Jet (MRJ) – PW geared fan engine
ICN Workshop Other Market Criteria
• Growing Market Share Approaching 100% May• Not Equal Dominance/Substantial Market Power • Examine how the relevant market works• Assess “other factors” such as (1) powerful buyers,
(2) bidding/winner-take-all contracts, (3) rivals’ success in adjacent markets, and (4) ongoing innovation by rivals
• Focus on whether there is evidence of a high decree of sustained pricing power – the RP’s definition of Dominance/Substantial Market Power
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Dominance, durability and ‘state-created monopolies’
ICN Unilateral Conduct Workshop
Simon Roberts
Introduction
• Durability of dominance is important in dominance assessment, and we are concerned with whether a firm’s dominant position is entrenched, and why
• Dangers of over-enforcement and chilling effects? - matters greatly how dominance was established
• A firm’s dominant position may be entrenched because of previous/ongoing state support, even though firm’s inefficiency and/or exercise of market power may mean there are some fringe competitors
• Dominant firm may have the power, incentive to engage in anti-competitive conduct to undermine effective competitive rivalry
• In many countries this is a big issue for competition authorities, compounded by relatively small markets, scale and scope effects, access to upstream markets/vertical integration etc.
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What should we be considering in ‘state-created monopoly’?
• Ownership
• But state support is much wider:– Subsidies, finance
– Rights to infrastructure, inputs etc
– Past regulatory provisions, licencing (such as marketing boards and legal cartels, where there may have been regional allocations)
• Not-regulated today (i.e. not talking here of regulated natural monopolies)
and
• Where the advantage bestowed is not transitory
• Relates to other considerations such as entry barriers, economies of scale/scope etc
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Illustrative Examples1. Grain Silos
• Owned by former cooperatives which had received high levels of state support and subsidies, now private companies, providing wide-range of services and also engaged in trading of grain
• Large investments required to build silos (although alternatives being used: silo bags)
• High local transport costs for grain
• Silo firms had set conditions linking farmers’ storage of grain to their own trading operations
2. Airlines (domestic flights)• National carrier still state-owned with government capital injections, after
failed privatisation, facing rivalry in local market in ‘full service’ and ‘low cost’ airlines
• Inducements to travel agents relating to sales/quotes of its flights over rivals
• Dominance? - Low cost and ‘full service’; time sensitive travel (corporate market)?
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Examples cont.
3. Industrial chemicals – fertilizer manufacture• Country’s major chemicals company; state-owned until 1990• Continued to receive state support (incentives, infrastructure)
advantageous access to inputs (natural gas pipeline supply)• Pricing main fertilizer chemicals against an imported alternative
fertilizer; alleged exclusionary actions against downstream blenders/distributors/importers
4. Beer• Incumbent brewer with c95% of market• Not state-owned but historically very close links with state• Entry barriers may appear low (scale economies etc), but issues
of branding, distribution etc• Various alleged exclusionary/restrictive conditions on distribution
and retail outlets
Implications?
• Avoid over enforcement / false positives – wrongly finding abusive conduct– this depends on the hurdle of dominance and on the criteria for
finding abuse
• Under enforcement is much more likely in countries with small markets, given scale economies etc; – higher levels of state support in the past and present further
reinforces this
– State support is one factor in ‘comprehensive consideration of factors affecting competitive conditions in the market under investigation‘
• Defining dominance is first step in effective enforcement against anti-competitive conduct by firms with entrenched dominance, especially state-created monopolies
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PANEL IIPANEL II
Criteria Used to Assess The Durability of
Market Power
BREAKBREAK
Webcast will resume at 4:35 PM