BSc Economics and related programmes Economics of Competition and Regulation EC 3015 Week 5: Abuse of dominance.

BSc Economics and related programmes

Economics of Competition and Regulation EC 3015

Week 5: Abuse of dominance

Overview

• Legal framework• Dominance• High prices, discrimination• Predation and exclusion• Examples: bus markets

2Abuse of dominance

Legal framework

• EU: Article 82• UK: Competition Act (+Enterprise Act 2002)

Two tests:Is the company dominant in the relevant market?Is it abusing the position?

High prices?Legal framework Predation/exclusion

3Abuse of dominance

Discrimination?

Dominance

• Establish market definition• Market power?

– “constraints on behaving independently” – e.g. other firms in same industry

=> market shares, level, stability

– new entry=> height of entry barriers


4Abuse of dominance

Discrimination? Dominance

EU:>50% => presumption of

dominance

OFT:<50% => “unlikely to be

dominant”

High prices

Reluctance by lawyers to engage with “high” prices:– temporary high prices an inducement to correct

shortages, etc?– choice of benchmark?– measuring cost may be difficult in practice

• especially with joint and common costs

– price regulation is complex & requires specialised resources


5Abuse of dominance


High prices

=> US and EU typically do not pursue high prices- but OFT guidelines suggest that excessive

prices could be caught if “excessive” prices persist and entry is not induced .


6Abuse of dominance


Discrimination?

Only an abuse under CA if it has an anti-competitive effect.

• e.g. London Electricity case• so might be considered a category of

predation


7Abuse of dominance


http://www.oft.gov.uk/shared_oft/ca98_public_register/decisions/londonelectricity.pdf

Abuse of dominance 8


Which jurisdiction(s) does not require notification of intended mergers?

Mergers 10

EU UK

Applies t

o both

Applies t

o neither

16%11%

5%

68%

1. EU2. UK3. Applies to both4. Applies to neither

What is the relevant market for case A?

11

X Y Z

Contradict

ory/uncle

ar

56%

11%

28%

6%

1. X2. Y3. Z4. Contradictory/unclear

X

YZ

A X: -1.8 Y: -1.0 Z: -0.5

What is the relevant market for case B?

12

X Y Z

Contradict

ory/uncle

ar

0%

50%

28%22%

B X: -0.4 Y: -1.5 Z: -5.6

XY

Z

1. X2. Y3. Z4. Contradictory/unclear

What is the relevant market for case C?

13

X Y Z

Uncle

ar/ co

ntradict

ory

21%

11%

42%

26%

C X : -7.4 Y: -6.1 Z: -2.0

X

YZ

1. X2. Y3. Z4. Unclear/

contradictory

Case D?

14

X Y Z

contra

dictory/

unclear

6%11%

22%

61%

D X: -12 Y: -2.1 Z: -0.5

1. X2. Y3. Z4. contradictory/unclear

LOOK AT CRITICAL LOSS ANALYSIS DISCUSSION


Predatory pricing

See detailed notes on web site"Conduct by a dominant firm designed to

eliminate, restrict, or deter competition”


16Abuse of dominance


Predatory pricing

Basic idea:1. Entry occurs into concentrated market2 .Incumbent lowers price3. Entrant leaves4. Incumbent raises prices again

Effect is exclusionary, and interferes with “normal” process of market entry and competition





Predatory pricing

McGee query:Can predation be profitable?-See .rtf notesDoes it cost the incumbent more than the

entrant? -depends on model of behaviour, etc.- and symmetry, or otherwise





Predatory pricing

Asymmetries may make predation plausible:– Finance– Reputation– Cost asymmetry– Demand– possible scope economies




Predatory pricing

Price tests:Areeda-Turner:

p<SRMC (proxied by AVC)

Williamson:expansion of output on entry (see fig 3 for a counterexample)

Baumolprice increase on exit

Ordover and Willig: profitable absent exit?




Predatory pricing

OFT"the acceptance of losses in a particular market which are

deliberately incurred in order to eliminate a specific competitor, so that supra-normal profits can be earned in the future, either in the same or other markets." (Emphasis added).”




Cutting price to drive out a new entrant will be profitable..

Alw

ays

Nev

er

As

long

as

prod

ucts

a..

If p

roduct

s ar

e hom

o...

Poss

ibly

if th

ere

are

s...

5%0%

58%

26%

11%

1. Always2. Never3. As long as products

are differentiated4. If products are

homogeneous5. Possibly if there are

sufficient asymmetries

What kind of firm is A (E=-8.5)

25

Simple m

onopoly

Perfect

competition

Monopolis

tic competition

Regulated m

onopoly

0%

24%

43%

33%

1. Simple monopoly2. Perfect competition3. Monopolistic

competition4. Regulated monopoly

What kind of firm is B (E=-1.8)

26

Simple m

onopoly

Perfect

competition

Monopolis

tic competition

Regulated m

onopoly

33% 33%

19%14%



What kind of firm is C (E=-0.5)

27

Simple m

onopoly

Perfect

competition

Monopolis

tic competition

Regulated m

onopoly

5%

43%

24%29%



SEE COMFY BUS CASE


BSc Economics and related programmes Economics of Competition and Regulation EC 3015 Week 5: Abuse of dominance.

Documents

abuse of dominance slide

dominance eu

abuse of dominance18

abuse of dominance8

contradictoryunclear

dominant slide

competition high prices

temporary high prices