Dominance (economics)


Market dominance is a measure of the strength of a brand, product, service, or firm, relative to competitive offerings, exemplified by controlling a large proportion of the power in a particular market. Dominant positioning is both a legal concept and an economic concept and the distinction between the two is important when determining whether a firm's market position is dominant.
There is often a geographic element to the competitive landscape. In defining market dominance, one must see to what extent a product, brand, or firm controls a product category in a given geographic area. There are several ways of measuring market dominance. The most direct is market share. This is the percentage of the total market served by a firm or brand. A declining scale of market shares is common in most industries: that is, if the industry leader has say 50% share, the next largest might have 25% share, the next 12% share, the next 6% share, and all remaining firms combined might have 7% share.
Market share is not a perfect proxy of market dominance. Although there are no hard and fast rules governing the relationship between market share and market dominance, the following are general criteria :
Market shares within an industry might not exhibit a declining scale. There could be only two firms in a duopolistic market, each with 50% share; or there could be three firms in the industry each with 33% share; or 100 firms each with 1% share. The concentration ratio of an industry is used as an indicator of the relative size of leading firms in relation to the industry as a whole. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the combined market share of the four largest firms, as a percentage, in the total industry. The higher the concentration ratio, the greater the market power of the leading firms.
Legally, the determination is often more complex. A case that can be used to define market dominance under EU Law is the United Brands v Commission where the court of justice said, 'the dominant position thus referred to by Article 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, customers and ultimately of its consumers’ The Commission’s Guidance suggests that market shares is only a ‘useful first indication’ in the process of assessing market power.
Another way of calculating market dominance, by looking at competition as market shares, are even less useful when assessing the competitive pressure that is exerted on an undertaking – i.e. the competition that would come from other firms that are not yet operating on the market but have the capacity to enter it in the near future. Of particular importance here are paragraphs 16 and 17 of the Commission’s Guidance…16. Competition is a dynamic process and an assessment of the competitive constraints on an undertaking cannot be based solely on the existing market situation. The potential impact of expansion by actual competitors or entry by potential competitors, including the threat of such expansion or entry, is also relevant. An undertaking can be deterred from increasing prices if expansion or entry is likely, timely and sufficient. For the Commission to consider expansion or entry likely it must be sufficiently profitable for the competitor or entrant, taking into account factors such as the barriers to expansion or entry, the likely reactions of the allegedly dominant undertaking and other competitors, and the risks and costs of failure.
There is also the Herfindahl index. It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 10,000, moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the Herfindahl index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.
Kwoka's dominance index is defined as the sum of the squared differences between each firm's share and the next largest share in a market:
where
As part of its merger review process, Mexican Competition Commission uses García Alba's dominance index, described as the Herfindahl index of a Herfindahl index. Formally, ID is the sum of squared firm contributions to the market HHI: where
Asymmetry Index is defined as the statistical variance of market shares:
Countervailing Buyer Power is something else that should be considered when calculating market dominance. In market where the buyers have more power than suppliers in determining prices or changes in the market a firm of high market share may not exercise its powers against competitors easily as it always has to be accountable to customers that give it its high market share and are not hesitant to switch product preference to the next firm. Such customers will need to have sufficient bargaining strength which will normally come from its size or its commercial significance in the industry sector
Previous findings of dominance can not be used to calculate dominance as agreed in the Coca-Cola v Commission case where it was Court held that the Commission must take a fresh approach to the market conditions each time it adopts a decision in relation to Art 102.
There are different perspectives of what indicates dominance and how to go about establishing dominance. One of these being the perspective of the European Commission regarding their application of Article 102 of the Treaty on the Functioning of the European Union, that deals specifically with the abuse of dominance in the market regarding competition law.
The European Commission equates dominance with the economic concept of substantial market power, which indicates that dominance can be exerted and abused, in its Guidance on A102 Enforcement Priorities. In paragraph 10 of the Guidance, it is stated that where there is no competitive pressure, an undertaking, which is a legal entity acting in the course of business, is probably able to exercise substantial market power. Furthermore, in paragraph 11, this is developed on, arguing if an undertaking can increase their products above the competitive price level, and does not face economic restraints, it is therefore dominant. For example, in basic terms, if two businesses are selling competing products, and one can increase their selling price, and not suffer an economic consequence such as a boycott of their products or a shift of their customers to a cheaper product, they are dominant.
The Guidance is not law, it is instead a set of rules the courts are to follow. However, the same definition can be found elsewhere, in Chapter 3 of the Unilateral Conduct Workbook. The Guidance is also supported by paragraph 65 of the Commission's judgement in United Brands v Commission.
“65THE DOMINANT POSITION REFERRED TO IN THIS ARTICLE 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 GIVING IT THE POWER TO BEHAVE TO AN APPRECIABLE EXTENT INDEPENDENTLY OF ITS COMPETITORS, CUSTOMERS AND ULTIMATELY OF ITS CONSUMERS."
The identification of the relevant and geographic market must first be established before being able to calculate shares or an undertaking’s dominance within that market. Dominance as an economic concept is determined within EU competition law through a 2-stage process, which first requires the identification of the relevant market as was established in Continental Can v Commission. This was affirmed in paragraph 30 of the judgement of AstraZeneca AB v Commission, in which the Commission stated that it must be assessed whether an undertaking is able to act independently of its competitors, customers and consumers.
The identification of the relevant and geographic market is assessed through the hypothetical monopolist test, which questions would a party's customer, switch to an alternative supplier located elsewhere, in response to a small relative price increase. Therefore, it is a question of interchangeability and demand substitutability, meaning whether one product can be a substitute for another, and whether an undertaking's market power puts them above price competition. The second stage of the test requires the Commission to look at various factors to see if an undertaking enjoys a dominant position on that relevant market.

Factors

Identifying a dominant position involves the use of several factors. The European Commission's Guidance on A102 states that a dominant position is derived from a combination of factors, which taken separately are not determinative. Therefore, it is necessary to consider the constraints imposed by existing supplies from, and the position of, actual competitors, meaning those who are competing with the undertaking in question. This involves looking at the day-to-day downwards pressure that retains low product prices and competitiveness within the market, which market shares are only useful as a first indication of; this needs to be followed by the consideration of other factors such as market conditions and dynamics.
The Guidance also states that the constraints imposed by the credible threat of future expansion by actual competitors, or entry by potential competitors, is a required factor of consideration. For example, Intellectual Property in the form of patent protection, is a potential legal barrier to entering the market for new businesses, as was shown in Microsoft Corp. In this case, the Court of Justice confirmed the Commission's decision, that Microsoft were dominant and had abused their dominant position regarding their refusal to supply the interoperability information for operating PC Windows with other systems. Microsoft was forced to licence out its interoperability data.
The final point that must be considered is the bargaining strength of the undertaking's customers, also known as the countervailing buyer power. This refers to the competitive constraints that customers may exert where they are a large size, or commercially significant, for a dominant firm. However, the Commission will not come to a final decision without examining all of the factors which may be relevant to constrain the behaviour of the undertaking.
Relevance of market shares
According to the European Commission, market shares provide a useful first indication of the structure of any market and of the relative importance of the various undertakings active on it. In paragraph 15 of the Guidance on A102, the European Commission state that a high market share over a long period of time can be a preliminary indication of dominance. The International Competition Network stress that determining whether substantial market power is apparent should not be based on market shares alone, but instead an analysis of all factors affecting the competitive conditions in the market, should be used.
100% market shares are very rare but can arise in niche areas, a close example of this being 91.8% market share in Tetra Pak 1 , and the 96% market share in plasterboard held by BPB in BPB Industries Plc v Commission OJ.
In Hoffman-La Roche v Commission, the Court of Justice said that large market shares are ‘evidence of the existence of a dominant position’ which led to the Court of Justice decision in AKZO v Commission that where there is market share of at least 50%, without exceptional circumstances, there will be a presumption of dominance that shifts the burden of proof on to the undertaking. The European Commission has affirmed this threshold in cases since AKZO. For example, in paragraph 100 of the Commission Judgment in the Court of First Instance in France Telecom v Commission, the Commission state that ‘…very large shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position…’, citing the Court of Justice judgement in AZKO, paragraph 60, ‘…this was so in the case of a 50% market share.’.
European Commission's Tenth Report on Competition implies that a significant disparity between the largest and the second-largest firm shares can indicate that the largest firm has a dominant position in the market. Specifically, under a section entitled "Scrutiny of mergers for compatibility with Article 86 EEC," the Report states: