DominanceMonopolies and Abuse of Dominance

Barbados Fair Trading CommissionProgram in Competition Law and PolicyBarbados – March 30 – 31, 2011

Sean DillonBureau of CompetitionUnited States Federal Trade Commission

These views are those of the author and do not necessarily represent the position of the Federal Trade Commission or any individual Commissioner.

2

The Concern:Market Power & the Monopoly Problem

Market Power – the ability to raise price above the competitive level without losing sales so that the price increase becomes unprofitable.

Because many companies have some market power, concerns arise only when a company has a substantial amount of market power for a significant period of time.

3

The Concern:Market Power & the Monopoly Problem

Generally, a monopolist will produce less and sell its products at a higher price than if it faced competition.

In effect, the monopolist creates artificial scarcity of its product.

In competitive markets, if a firm tries to create artificial scarcity by producing less or charging more, its rivals will seize the opportunity to make more sales by increasing production and lowering price.

4

Abuse of Dominant PositionBarbados Law

Fair Competition Act, Section 16 Prohibits the abuse of a dominant

position. Does not prohibit a dominant position,

only its abuse.

5

Comparison with United States Law

In the U.S., our laws are written in terms of monopolization.

Under Section 2 of the U.S. Sherman Antitrust Act, it is unlawful to monopolize or attempt to monopolize.

6

U.S. Monopolization Standard In the U.S., monopolization is illegal when a

firm: Willfully acquires or maintains market power in a

relevant market, and does so by means other than:

Superior product Superior business acumen Superior service Good luck, or similar factors

The existence of a monopoly is not illegal. The focus is on the exclusionary nature of conduct.

7

The Concern

A company with a dominant market position may use that dominance to exclude competition improperly.

However, care must be taken because exclusionary behavior can closely resemble vigorous competition, which leads to lower prices, optimal production, and innovation.

The U.S. law does not prohibit everything that a company with a dominant position does.

Harm to a rival does not necessarily mean harm to competition.

8

Elements of Proof for Monopolization in the United States

1. Monopoly Power A “relevant” market; A large market share; and The ability to set and maintain prices above a

competitive level (i.e., without regard to competitor reaction)

2. Conduct that is Likely to Harm Competition Conduct that unreasonably excludes

competition, as opposed to competition on the merits.

Competitors frequently complain about behavior that is merely robust competition.

3. No Legitimate Business Justification

4. Anticompetitive Effects

9

Steps in Analyzing Monopolizing Conduct Step 1: Identify the “relevant” market in

which an abuse of a dominant position is suspected.

Step 2: Determine whether a company has sufficient control of that market to constitute a dominant position.

Step 3: Identify the business practice that may harm competition.

Step 4: Assess the business practice’s overall competitive effects.

10

Step 1: Identify the Relevant Market

What is a relevant market? That group of products that significantly

constrain each other’s pricing, when viewed from the perspective of both consumers (the demand side) and producers (the supply side).

A relevant market has both product and geographic dimensions.

Same analysis as in a merger context.

11

Step 2: Establish Whether the Company has a Dominant Market Position

Assessing whether a company has a dominant position requires the consideration of a range of factors.

Assessing market entry conditions and other structural factors are an integral part of the analysis necessary to find a dominant position.

Measures of market share and entry conditions are similar to those used in a merger context.

12

Step 3: Identify the Business Practice Constituting an Abuse of Dominance

Generally only firms with large market shares in well-defined markets likely to run afoul of the law.

Practices that may be viewed as competitively neutral or pro-competitive when engaged in by firms without market power may be anticompetitive when engaged in by firms with market power.

In the U.S., we focus on exclusionary practices – an attempt to create or maintain dominant position by suppressing competition.

13

Step 4: Assess the Business Practice’s Overall Competitive Effects

How does the business practice actually operate? What competition, if any, is being

eliminated? How much competition remains?

Does the business practice have any likely competitive benefits? Does it create any efficiencies?

14

Dominant Firm Behaviors

Excessive Pricing Tied Selling/Bundling Predatory Pricing Exclusive Dealing Refusals to Supply Market Restriction Price Squeezing

15

Excessive Pricing

In the U.S., pricing behavior alone is rarely an abuse of dominance. It is a natural consequence of a monopolistic

market structure and does not lead to creating or maintaining a monopoly.

High pricing should encourage competitors to enter the market and lower prices or improve quality. However, if new entrants are restricted by the

anticompetitive actions of the dominant firm, enforcement may be appropriate.

16

Tying/Bundling

Tying occurs when a seller of product A and B requires all purchasers of A (the tying product) to also buy product B (the tied product).

Bundling occurs when products A and B are only sold together.

A bundled discount occurs where products A and B sold together cost less than sold separately.

A loyalty discount can be viewed as a bundled discount where today’s product is bundled with tomorrow’s product.

Law and economics of monopolization

17

Tying/Bundling

Typically A is a monopoly product, B is at least somewhat competitively produced, or could be.

Elements for Proof of a Tying Case:

There are two distinct products.

The seller has required the buyer to purchase the tied product in order to obtain the tying product.

The seller has market power in the tying product.

The tying lacks an efficiency justification.

The tying has an anticompetitive effect of significant potential for competitive harm.

18

Economic Justifications for Tying The practice of bundling is pervasive throughout

economy, even in situations where firms have no market power.

Convenience/Customer Preference/Efficiencies Left and right shoes Car engine and car body

Quality Assurance Franchise agreements require McDonald’s franchisees to

buy food from McDonald’s wholesale Price Discrimination/Secret Price Discounts

Tying can enable a firm to charge different prices to different people for the same product

Metering IBM was able to meter usage of its computers by tying

sales of punch cards

Law and economics of monopolization

19

Anticompetitive Theories of Tying

Leveraging market power – when a company with monopoly power over one product ties this product with another to gain market power over the second.

Raising barriers to entry – tying can make entry more difficult, or encourage exit, because a company that wishes to compete may only be able to do so by making both products.

Evasion of Price Regulation Telephone service rates and equipment

Law and economics of monopolization

20

Example of Tying

Resort with a restaurant ties room and food for guests.

Restaurant open to other tourists besides guests at resort.

By forcing resort guests to use restaurant, the resort can deny sufficient scale for other restaurants, and then charge monopoly prices to other tourists.

However, selling an all-inclusive package may also be a good way to market the resort because it could alleviate uncertainty tourists have about the expense of a vacation.

21

Predatory Pricing Behavior Where a firm first lowers its price to force

its rivals to exit the market and then raises its price after its rivals have exited.

In the U.S., a plaintiff must prove: that the prices complained of are below an

appropriate measure of its rival’s costs,and

that the competitor had a reasonable prospect of recouping its investment in below-cost prices. (Brooke Group)

22

Predatory Pricing

The second requirement requires that consumers are ultimately harmed by the alleged episode of predatory pricing. Documentary evidence of strategy. Data showing long run price increase.

In the U.S., there is a high standard for proving predatory pricing:

It is believed that price cutting is competitive rather than anticompetitive.

“Predatory pricing schemes are rarely tried and even more rarely successful.” (Matsushita)

The U.S. Supreme Court appears reluctant to discourage conduct that results in lower pricing.

23

Economics of Exclusive Contracts

Exclusive contracts are a way to gain some of the efficiencies of a vertical relationship without an actual merger.

Economic models of foreclosure can show harm to competition (example, raising rivals costs).

Potential efficiencies: Long term contracts prevent “free rider”

effects. Encourage customer/producer to make

relationship-specific investments.

24

Refusals to Supply/Refusals to Deal

In general, any business – even a monopoly – may choose its business partners.

Under certain circumstances, there may be limits on this freedom for a firm with market power. Refusals to sell a product or service to a

competitor that the monopolist makes available to others

Stops doing business with a competitor that the monopolist has done business with before, and no legitimate business reason for the change

25

Market Restriction

This occurs where a supplier, as a condition for supplying the goods, requires an independent dealer to supply the goods only in a specified market.

Example, a firm supplying agricultural products may demand as a condition of supply that a retailer only retails those products in a limited prescribed area.

26

Price Squeezing/Margin Squeezing

Upstream firm sells an input or raw material for which there are no good substitutes to companies against which the upstream firm is competing in the downstream market.

A price squeeze arises when the upstream firm sells the input at a price so high that the buying firm is forced to sell the derived product in the downstream market at a price higher than competitive prices.

Such price squeezing will result in a restriction of competition in the derived product market.

27

Example of Price or Margin Squeeze

Upstream firm owns the infrastructure and facilities that connect homes and businesses to the telephone network.

Upstream firm is vertically integrated and sells telephone service or broadband Internet service at retail.

Competitors at retail must buy access to the infrastructure from the upstream firm.

Upstream firm charged a high price for access to the lines and a low price for service to its retail customers.

28

No Complete List of Abusive Conduct

“Anticompetitive conduct” can come in too many different forms, and is too dependent upon context, for any court or commenter ever to have enumerated all the varieties.

29

Exemptions under Barbados Law

Behavior is exclusively directed to improving the production or distribution of goods or to promoting technical or economic progress and consumers are allowed a share of the resulting benefit.

Effect or likely effect of its behavior in the market is the result of its superior competitive performance.

Enforcing a right under existing copyright, patent, registered design or trademark.

30

Concluding Points 1. For a company to abuse its dominant position, it

must first be found to have a dominant market position.

2. Merely having a dominant position does not violate the law.

3. The law prohibits conduct by a company with a dominant market position only when it injures competition and consumers.

4. Harm to a rival does not necessarily cause harm to competition.

5. In practice, it is difficult to distinguish between an abuse of a dominant market position and hard-fought competition.