Assessment of Dominance (SMP) for Relevant Markets Susceptible to ex-ante Regulation. Peter Alexiadis Partner Gibson, Dunn & Crutcher LLP/Brussels Office.

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

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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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Criteria of dominance emerging

from case-law and

administrative practice

Market shares

Degree of dependence of customers or suppliers

The structure of the firm itself

Technological resources

Production capacity

Access to raw materials

Financial strength

The conduct of the firm on the market

I. Individual Dominance

The structure of the relevant market

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Relevance/Limitations

of Market Shares

Proxy for market power (extent of negative impact on the market)

Absolute market shares> 40%> 50%

Relativity of market shares

Stability/volatility

“In” and “for” the market (innovative markets)

No substitute for full economic analysis

I. Individual Dominance

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Immediate/Actual

Competitive Constraints (1)

Number of competitors / size / gaps

Efficiencies of competitors

Raising rivals’ costs

Existing regulatory obligations

Switching costs

Market share movement

Barriers to expansion

Effectiveness of actual competition

I. Individual Dominance

Profitability / ROCE

Network Effects

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Immediate/Actual

Competitive Constraints (2)Competitors compared to

market leader with

Absolute size / “deep pockets”

Technological advantages

Access to capital

Sales / marketing relationships

IP rights

Vertical integration / control of infrastructure

Economies of scale / scope

Market conduct

Information asymmetries

I. Individual Dominance

Firm cultures

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Countervailing Bargaining

Power

Nature of buyer

Customer knowledge / indifference / information asymmetries

Switching costs

Efficiencies of customer response (theoretical/actual)

I. Individual Dominance

Wholesale / retail

Individuals / groups

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Potential Competition

Entry Barriers / Exit Barriers

Innovation characteristics

History of new entry / effects of new entry

Sustainable entry or expansion / associated risks / costs of entry

Likely response of dominant firm

I. Individual Dominance

Regulatory

Strategic

Timeframe for analysis / likelihood of entry

Shifts in value / incentives to integrate / incentives to consolidate

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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

I. Individual Dominance

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Level of Assessment – Examples from the Consultation Process

Austria / Fixed transit services -> Market shares / Alternatives to ubiquitous network in absence of regulation.

UK / Call termination on individual fixed networks -> Monopoly provider / Barriers to entry (cost efficiencies) /BT’s countervailing buyer power.

I. Individual Dominance

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.

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 / 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.

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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 / Call termination on individual mobile networks -> 100% market share / Control over network / Horizontal integration / Lack of actual and potential competition / Financial strength.

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 / 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.

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Level of Assessment – Examples from the Consultation Process

Ireland / Broadcasting transmission services -> Market shares / Barriers to entry / Absence of countervailing bargaining power / Lack of potential competition / Evidence of market behaviour.

I. Individual Dominance

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 ofmarket 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.

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.

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II. Collective Dominance

Discussion Items

Varying Approaches in different legal instruments such as Merger Regulation, Framework Directive,

Article 82 EC - different policy directions

Legal & Economic Concepts

Identification of Essential Elements

Burdens of proof under different legal instruments

Article 82Dominance / Conduct

Merger RegulationDominance / ???

Framework DirectiveDominance / Conduct

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Definitions

Collective/joint/oligopolistic

Concept of tacit collusion

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

II. Collective Dominance

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Essential Elements

Incentive compatibility

Credibility of co-ordination

Market concentration

Repeated interaction betweenfirms

Barriers to entry/exit

Market transparency

Retaliation measures

Lack of effective competitive constraints

II. Collective Dominance

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MarketConcentration

Relationship between no. market players & respective market shares

Less market share spread/less no. market players –greater competition concerns

Greater no. of competitors increases complexity of interrelationships

Individual market shares/market share symmetries/relativemarket 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

II. Collective Dominance

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RepeatedInteraction

Interconnection Relationships

Trade Associations

Commercial Contacts

II. Collective Dominance

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Collective dominance not of concern in markets with low entry barriers

Barriers to entry/exit

Anti-competitive prices would trigger market entry (long termor “hit and run” basis)

Technological barriers (e.g., local loop)

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

II. Collective Dominance

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MarketTransparency

Each member must have the ability to know how other membersare behaving in order to adopt a common policy.

“Sufficiently quickly & precisely” (Airtours)

Age of information being exchanged

Transparency of additional factors (production capacity, sales, investments)

Price transparency

Actual prices & rates

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

II. Collective Dominance

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Lack of EffectiveCompetitive Restraints

Actual Competitors

Market Entry

Customers

Unwillingness to tacitly collude

Cost/quality considerations; varyingprofit strategies or other asymmetries

Recent new entry can have a destabilising effect

Barriers to expansion

Supra-competitive profits attract market entry

Low barriers to entry/exit

Innovation

Maturity of marketplace

Other structural characteristics

Purchasing power

Awareness

II. Collective Dominance

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RetaliationMeasures

“Cheating” firms must be capable of being retaliated against

Variety of retaliation mechanisms

Effectiveness of measures dependenton various factors

Reversion to normal competition

Price wars, targeted action or other legitimate business activities

Time period for competitor reaction

Frequency of interactions (e.g., price adjustments or access negotiations)

Structural elements of market (e.g., long termcustomer constraints)

Profit maximisation (e.g, short term/long term)

Whether market characterised by cost or quality synergies

II. Collective Dominance

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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

II. Collective Dominance

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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.

II. Collective Dominance

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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

II. Collective Dominance

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III. Leveraged Dominance

Authority

Article 14(3) Framework Directive

Clause 3.1.1, SMP Guidelines

Case-law

Remedies discussion, Relevant Markets Recommendation

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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.

III. Leveraged Dominance

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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.