CH3: Market Power

What is market power?

Market power is the ability to profitably maintain prices above competitive levels for a period of time or to reduce output, quality, variety, or innovation below competitive levels for a sustained period of time.

In EU competition law, a dominant firm is one that possesses individually or jointly with others sufficient economic strength to behave independently of competitors, customers, and consumers, and is able to weaken the competitive process itself.

What is the market power spectrum in competition law?

Market power exists along a spectrum rather than as a simple yes/no concept.

The spectrum ranges from differentiated product power, to appreciable effects under Article 101, to dominance under Article 102, to super-dominance, and finally monopoly situations.

What are the Article 101 and De Minimis rules?

Under Article 101 and De Minimis rules, agreements are generally considered unlikely to appreciably restrict competition when the combined market share remains below 10%.

What is the Vertical Agreements Block Exemption?

The Vertical Agreements Block Exemption generally applies when the supplier market share is below 30% and the buyer market share is below 30%.

However, hardcore restrictions such as price fixing or market sharing remain prohibited regardless of market share.

When is dominance presumed under Article 102?

Dominance is often presumed where market shares exceed roughly 40–50%.

These thresholds are indicative rather than absolute.

What indicators are used to assess market power?

The main indicators used to assess market power are behaviour, financial performance, existing competition, prospective competition, and buyer power.

What indicates lower versus higher market power in terms of behaviour?

Lower market power is indicated by no ability to engage in anti-competitive practices.

Higher market power is indicated by the ability or evidence of engagement in anti-competitive practices.

What indicates lower versus higher market power in terms of financial performance?

Lower market power is indicated by prices in line with costs and profits in line with competitive levels.

Higher market power is indicated by prices substantially above costs over the long term and excessive profits over the long term.

What indicates lower versus higher market power in terms of existing competition?

Lower market power is indicated by low market shares and existing switching options for customers.

Higher market power is indicated by high market shares and a low number of switching options.

What indicates lower versus higher market power in terms of prospective competition?

Lower market power is indicated by low entry and exit barriers. Higher market power is indicated by high entry barriers.

What indicates lower versus higher market power in terms of buyer power?

Lower market power is indicated by a strong negotiating position by suppliers or customers.

Higher market power is indicated by a weak negotiating position by suppliers or customers.

What is the Three Forces Framework for assessing market power?

The Three Forces Framework assesses market power through existing competition, potential competition, and buyer power.

These three forces determine whether a firm is effectively constrained in the market.

What is existing competition?

Existing competition concerns the current competitive constraints faced by a firm. A key question is how concentrated the market is.

Several measurement approaches are used, including the number of competing firms, Cn measures, and the Herfindahl–Hirschman Index.

What is the number of competing firms as a measure of concentration?

The number of competing firms is a simple indicator of concentration.

More firms generally imply stronger competition.

However, the number of firms alone may be misleading if one firm is much larger than the others.

What are Cn measures?

Cn measures calculate the combined market share of the top N firms.

For example, C4 is the combined market share of the four largest firms. Higher C4 values suggest stronger concentration.

What is the Herfindahl–Hirschman Index, or HHI?

The HHI is one of the most widely used concentration indicators.

It is calculated as the sum of market shares squared for all firms in the market, where si is the market share of firm i.

Because market shares are squared, the HHI gives greater weight to larger firms.

How should the HHI be interpreted?

The HHI ranges from 0, which corresponds to perfect competition, to 10,000, which corresponds to monopoly.

The HHI captures not only concentration, but also asymmetry between firms.

Two industries may have identical C4 values but different HHI values because firm size distribution differs.

What are the main competition thresholds used as screening tools?

Under Article 102 TFEU, dominance is normally presumed if market share is above 40–50%.

Under Article 101 TFEU for EU vertical agreements, the Block Exemption applies if combined market share is below 30%, with individual shares below 15%.

In US monopolisation cases, thresholds depend on the practice at issue, for example 60–70% in exclusive-dealing cases.

In EU mergers, a market share below 25% and HHI below 1,000 are generally unproblematic, while a post-merger HHI above 2,000 indicates a highly concentrated market, although an increment below 150 may be acceptable.

Why are concentration indicators not definitive legal tests?

Concentration indicators are screening tools rather than definitive legal tests.

They help identify possible market power concerns, but authorities must also assess other factors such as:

• entry barriers,

• switching options,

• buyer power,

• market dynamics,

• the nature of competition.

What is potential competition?

Potential competition concerns future competitive constraints arising from possible market entry.

Even highly concentrated markets may remain competitive if entry barriers are low and firms can enter easily.

What is a barrier to entry?

A barrier to entry is a cost borne by entrants but not by incumbent undertakings.

Barriers to entry make it harder for new firms to enter and compete with existing firms.

Why do exit barriers matter for potential competition?

If firms expect exiting the market to be costly, they may avoid entering altogether.

Therefore, exit barriers can deter entry and reduce potential competition.

What is contestable market theory?

Contestable market theory suggests that even highly concentrated markets may remain competitive if entry barriers are low and firms can enter easily.

The threat of entry can discipline incumbent firms.

What are the main types of barriers to entry and exit?

The main types of barriers to entry and exit are absolute barriers, intrinsic or structural barriers, and strategic barriers.

What are absolute barriers to entry?

Absolute barriers to entry include intellectual property rights. These barriers can directly prevent or restrict entry by new firms.

What are intrinsic or structural barriers to entry?

Intrinsic or structural barriers to entry include economies of scale, switching costs, and network effects.

These arise from the structure or economics of the market itself.

What are strategic barriers to entry?

Strategic barriers to entry include reputation, loyalty, and informational barriers.

These may be created or reinforced by incumbent firms and can make entry more difficult.

What is buyer power?

Buyer power is market power in reverse.

Just as powerful sellers can restrict supply to raise prices, powerful buyers can use their position to influence terms, prices, and quantities.

What is monopsony power?

Monopsony refers to a market with a single dominant buyer.

A monopsonist may reduce purchases, push prices downward, and reduce production below competitive levels.

This can generate deadweight loss through inefficiently low output.

How can large buyers exercise bargaining power?

Large buyers may negotiate discounts, favourable terms, and lower input prices.

This does not necessarily reduce consumer welfare and can even act as countervailing power against dominant suppliers.

When can buyer power benefit consumers?

Whether consumers benefit from buyer power depends on competition in downstream markets.

If downstream markets remain competitive, lower supplier prices may be passed on to consumers.

What is countervailing buyer power?

Countervailing buyer power occurs when powerful customers constrain the market power of dominant suppliers.

Large buyers can discipline suppliers if they have credible alternatives and strong bargaining positions.

What was the Kerry/Headlands merger case?

The Kerry/Headlands case concerned frozen ready meals in the UK.

The firms were direct competitors with around 70% combined market share. Customers included large grocery retailers and smaller retailers.

Entry was easy through own-brand products and imports, and switching was easy within 2–12 weeks because rivals had spare capacity.

What was the Bolton/Simmenthal merger case?

The Bolton/Simmenthal case concerned canned meat in Italy. The firms were direct competitors with around 70% combined market share.

Customers included large grocery retailers and small retailers.

Entry was difficult because the parties had high-quality brand reputation, own labels were only fringe competitors, alternatives were limited, and the main production facilities belonged to the merging parties.

What lesson can be learned from comparing Kerry/Headlands and Bolton/Simmenthal?

The lesson is that market shares alone can be an unreliable indicator of market power, particularly in differentiated product markets.

A thorough assessment is needed considering many factors such as entry conditions, switching possibilities, customer power, brand strength, spare capacity, and alternatives.

Is market power prohibited in itself?

Market power is not prohibited per se. What is prohibited is the abuse of market power.

Why may high profits not automatically indicate market power?

High profits may reflect efficiency or a market characterised by high levels of innovation.

Therefore, high profits do not automatically prove anti-competitive market power.

Why are both dynamic and static assessments required in market power analysis?

Dynamic as well as static assessment is required because market power depends not only on current market shares and concentration, but also on future entry, innovation, changing competitive constraints, barriers to expansion, and market evolution.