Assessment of Dominance (SMP) for Relevant
Markets Susceptible to ex-ante Regulation.
Peter Alexiadis
Partner
Gibson, Dunn & Crutcher LLP/Brussels Office
A presentation for the ITS 15th Biennial Conference
Berlin, 4-7 September 2004
Table of Contents
I. Individual Dominance
II. Collective Dominance
III. Leveraged Dominance
IV. Conclusions
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I. Individual Dominance
Legal Standards of Dominance
“The dominant position referred to in Article [82] relates to a position of economic strength enjoyed
by an undertaking which enables it to prevent effective competition being maintained on the
relevant market by affording it the power to behave to an appreciable extent independently of its
competitors, its customers and ultimately consumers”.
• Case 27/76, United Brands v. Commission
“The existence of a dominant position may derive from several factors, which, taken separately, are
not necessarily determinative but among these factors a highly important one is the existence of
very large market shares”.
• Case 85/76, Hoffmann-La Roche / Commission
[Other factors include: size of operations, wide geographical presence, financial resources,
vertical integration, product range, essential facilities.]
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I. Individual Dominance
Legal Standards of Dominance
“… although the importance of the market shares may vary from one market to another the view may
legitimately be taken that very large market shares are in themselves, and save in exceptional
circumstances, evidence of a dominant position.”
• Case 85/76, Hoffmann-La Roche / Commission
“Without going into a discussion about percentages … [dominance] must be determined having regard
to the strength and number of the competitors”.
• Case 27/76, United Brands v. Commission
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I. Individual Dominance
Market shares
The structure of the relevant market
Degree of dependence of customers or suppliers
Criteria of dominance emerging
from case-law and
administrative practice
The structure of the firm itself
Technological resources
Production capacity
Access to raw materials
Financial strength
The conduct of the firm on the market
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I. Individual Dominance
Proxy for market power (extent of negative impact on the market)
Absolute market shares
> 40%
> 50%
Relevance/Limitations
of Market Shares
Relativity of market shares
Stability/volatility
“In” and “for” the market (innovative markets)
No substitute for full economic analysis
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I. Individual Dominance
Number of competitors / size / gaps
Barriers to expansion
Market share movement
Switching costs
Immediate/Actual
Competitive Constraints (1)
Efficiencies of competitors
Raising rivals’ costs
Existing regulatory obligations
Effectiveness of actual competition
Profitability / ROCE
Network Effects
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I. Individual Dominance
Absolute size / “deep pockets”
Technological advantages
Access to capital
IP rights
Immediate/Actual
Competitive Constraints (2)
Competitors compared to
market leader with
Sales / marketing relationships
Vertical integration / control of infrastructure
Economies of scale / scope
Market conduct
Information asymmetries
Firm cultures
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I. Individual Dominance
Wholesale / retail
Nature of buyer
Individuals / groups
Switching costs
Countervailing Bargaining
Power
Customer knowledge / indifference / information asymmetries
Efficiencies of customer response (theoretical/actual)
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I. Individual Dominance
Regulatory
Entry Barriers / Exit Barriers
Strategic
Innovation characteristics
History of new entry / effects of new entry
Potential Competition
Sustainable entry or expansion / associated risks / costs of entry
Likely response of dominant firm
Timeframe for analysis / likelihood of entry
Shifts in value / incentives to integrate / incentives to consolidate
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I. Individual Dominance
Market Share Evaluation (Empirical issues)
Data
Sources
Parties, competitors, customers,
buyers, suppliers, trade associations,
market research report
Measurements
Revenues, volumes, production
capacities, inputs depending on
markets concerned and available data
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I. Individual Dominance
Level of Assessment – Examples from the Consultation Process
Austria / Fixed transit services -> Market shares / Alternatives to ubiquitous network in absence of regulation.
Austria / Mobile access and call origination -> Decreasing market share / High entry barriers / No barriers to expansion
(finance / infrastructure / technology / vertical integration of competitors) / High level of substitutability /
Market transparency / Degree of countervailing buyer power.
UK / Leased lines markets -> Market shares (high and stable) / Technological advantages or superiority /
Barriers to entry / Economics of scale and scope / Absence of countervailing buyer power / Lack of actual and potential
competition / Evidence from international benchmarking.
UK / Mobile voice call termination on individual networks -> Market share / Entry barriers /
Excessive prices and profitability / Countervailing buyer power & “calling party pays” arrangements /
Need to take into account pricing behaviour.
UK / Call termination on individual fixed networks -> Monopoly provider / Barriers to entry (cost efficiencies) /
BT’s countervailing buyer power.
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I. Individual Dominance
Level of Assessment – Examples from the Consultation Process
Finland / Leased lines markets -> Market shares / Control over infrastructure / Vertical and horizontal integration /
Actual and potential competition / Product range / Established customer relations / Economic strength.
Finland / Public fixed telephony for residential & non-residential customers ->
Market shares / Prices / Other market data / Lack of consideration of existing remedies.
Finland / Public fixed international telephony for residential & non-residential customers ->
Market shares / Existing remedies.
Finland / Mobile access & call origination -> 60% market share relative to competitors (29 : 10.5 : 0.1%) /High entry
barriers / Economics of scale & scope and financial strength / Relationship with ISP / No countervailing buyer power.
Finland / Call termination on individual mobile networks -> 100% market share / Control over network /
Horizontal integration / Lack of actual and potential competition / Financial strength.
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I. Individual Dominance
Level of Assessment – Examples from the Consultation Process
Greece / Call termination on individual mobile networks -> Market shares / Monopolistic market structure /
Absence of potential competition (barriers to entry / technological alternatives / structural changes in market) /
Low countervailing buyer power / Anti-competitive practices.
Ireland / Broadcasting transmission services -> Market shares / Barriers to entry /
Absence of countervailing bargaining power / Lack of potential competition / Evidence of market behaviour.
Ireland / WBA -> Market shares relative to competitors / Market entry / Vertical integration / Credible alternatives.
Portugal / Retail markets for fixed telephony -> Market shares / HHI concentration index / Overall size of
market leader / Barriers to entry and expansion / Absence of countervailing bargaining power / Profitability.
Portugal / Fixed call origination & call termination on public telephone networks ->
For origination: same criteria as for retail markets (above)
For termination: Monopoly position / Price levels / History of regulation / Profitability /
Absence of countervailing bargaining power.
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II. Collective Dominance
Legal & Economic Concepts
Discussion Items
Identification of Essential Elements
Varying Approaches in different
legal instruments such as Merger
Regulation, Framework Directive,
Article 82 EC - different
policy directions
Burdens of proof under different
legal instruments
Article 82
Dominance / Conduct
Merger Regulation
Dominance / ???
Framework Directive
Dominance / Conduct
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II. Collective Dominance
Collective/joint/oligopolistic
Concept of tacit collusion
Definitions
A group of firms able to adopt through implicit collusion a
common policy on the market and to act to a considerable extent
independently of their suppliers & customers
Frequently examined in communications sector –
Vodafone/Airtouch, FT/Orange, BT/ESAT Telecom,
MCI WorldCom/Sprint, Roaming Enquiry
National cases: Meridian/Eircell, Telia Finland
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II. Collective Dominance
Market concentration
Repeated interaction between
firms
Incentive compatibility
Barriers to entry/exit
Essential Elements
Credibility of co-ordination
Market transparency
Retaliation measures
Lack of effective
competitive constraints
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II. Collective Dominance
Relationship between no. market players &
respective market shares
Less market share spread/less no. market players –
greater competition concerns
Market
Concentration
Greater no. of competitors increases complexity of
interrelationships
Individual market shares/market share symmetries/relative
market shares
Market share litmus test difficult to identify
Market share comparisons relevant where markets have
“fundamentally similar characteristics”
Increasing use of economic indices e.g.
HHI of Concentration Index
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II. Collective Dominance
Commercial Contacts
Repeated
Interaction
Trade Associations
Interconnection Relationships
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II. Collective Dominance
Collective dominance not of concern in markets with low entry barriers
Anti-competitive prices would trigger market entry (long term
or “hit and run” basis)
Technological barriers (e.g., local loop)
Barriers to entry/exit
Legal barriers, e.g., spectrum and limited no. of licences
Regulatory barriers, e.g., price controls
Strategic entry barriers, e.g., long-term customer contracts
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II. Collective Dominance
Each member must have the ability to know how other members
are behaving in order to adopt a common policy.
“Sufficiently quickly & precisely” (Airtours)
Market
Transparency
Actual prices & rates
Price transparency
Other market information from which prices
of sales can be derived
Public price lists, discount policies, inter-firm
transfers, industry association publications,
customer feedback
Price transparency & common costs
Homogenous products
Transparency of additional factors (production capacity, sales, investments)
Age of information being exchanged
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II. Collective Dominance
Unwillingness to tacitly collude
Actual Competitors
Cost/quality considerations; varying
profit strategies or other asymmetries
Recent new entry can have a destabilising effect
Barriers to expansion
Lack of Effective
Competitive
Restraints
Supra-competitive profits attract market entry
Market Entry
Low barriers to entry/exit
Innovation
Maturity of marketplace
Other structural characteristics
Purchasing power
Customers
Awareness
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II. Collective Dominance
“Cheating” firms must be capable of
being retaliated against
Reversion to normal competition
Variety of retaliation mechanisms
Retaliation
Measures
Price wars, targeted action or other legitimate
business activities
Time period for competitor reaction
Effectiveness of measures dependent
on various factors
Frequency of interactions (e.g., price
adjustments or access negotiations)
Structural elements of market (e.g., long term
customer constraints)
Profit maximisation (e.g, short term/long term)
Whether market characterised by cost or
quality synergies
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II. Collective Dominance
Level of Assessment
Dynamic vs. static approach
Margin of discretion
Purpose of various instruments: Article 82 EC, Merger Regulation, or Framework Directive
Rigorous economic analysis vs. checklist approach
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II. Collective Dominance
Level of Assessment – Examples from the Consultation Process
Austria / Mobile access & call origination -> Decreasing concentration ratio /
Asymmetric market share distribution (47 : 25 : 20%) / No evidence of foreclosure
– cooperation agreements and airtime resale agreements negotiated commercially.
UK / Mobile access & call origination -> Derived market shares from retail level / Market
shares measured in terms of subscriber numbers, call minute volumes, revenues, etc. - relevance
of figures / International benchmarking of concentration measures – relevance of HHI measures.
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II. Collective Dominance
AIRTOURS – Case Example
Collective Dominance test:
1. Transparency allowing monitoring
2. Existence of a punishment mechanism
3. Taking into account of reactions of customers and competitors
undermining benefits of collusion
 Need of “convincing evidence” based on review of
level of competition” at the time of notification
 Must not confuse acceptable oligopolistic interaction
with tacit coordination (e.g., “cautious” capacity
settlements)
 Relevance of market change through acquisition
 Avoidance of a “checklist” approach; need for factors
to facilitate coordination
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III. Leveraged Dominance
Article 14(3) Framework Directive
Clause 3.1.1, SMP Guidelines
Authority
Case-law
Remedies discussion, Relevant Markets Recommendation
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III. Leveraged Dominance
TETRA – Case Example
Leverage test:
1. The competitive harm flowing from conglomerate mergers
is inherently more difficult to predict than cases of
traditional horizontal mergers. Accordingly, a strong economic
and factual analysis of affected markets is required to
substantiate an allegation of leveraging of dominance.
2. Leverage theories continue to have a role to play in merger cases.
In this regard, technological ties or product bundling through
discounting might be the result of the leveraging of dominance,
but:
 the ability of a firm to leverage does not mean it will have the
economic incentive to do so;
 it will often not be profitable for a firm to extend a
strong position in a market to another;and
 the importance of alternative ex post remedies
(e.g., under Article 82 EC) should be taken into account
.
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IV. Conclusions
 Commission review is thorough. It is not a rubber-stamping exercise.
No substitute for economic analysis on the part of the NRA.
Market share data needs to be interpreted carefully.
Different emphases regarding factors relevant to wholesale and retail markets.
Impact of self-supply issues on SMP assessment.
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