African Competition Forum Investigating Abuse of Dominance Markus H. Meier Assistant Director African Competition Forum March 25, 2013

The Concern: Market Power & the Monopoly Problem “Market Power” – the ability of a firm to raise price above the competitive level without losing so many sales so rapidly that the price increase becomes unprofitable. Because many firms have some market power, competition concerns arise only when a firm has a substantial amount of market power for a significant period of time.

Market Power & the Monopoly Problem – Continued • 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 see this as an opportunity to make more sales by increasing their production and lowering the price. Why isn’t this happening?

Elements of Proof for Abuse of Dominant Position A Dominant Position Relevant market High market share & barriers to entry Conduct that May Harm Competition No Legitimate Business Justification Anticompetitive Effects

General Steps in Analyzing Alleged Abuse of Dominance Step 1: Define the relevant market in which a dominant position is suspected. Step 2: Determine whether a company has sufficient market power 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 in the market.

Step 1: Define the Relevant Market What is a “relevant” market? That group of products that significantly constrain each other’s pricing, when viewed from both the demand side (consumers) and supply side (producers). Has both product and geographic dimensions The “hypothetical monopolist” test A market that could be subject to the exercise of market power. Example: What market does Coca-Cola compete in?

Key Questions in Defining Markets What products do consumers view as reasonable substitutes? Considering price, use, quality, and other significant characteristics What alternative products can others supply, and under what circumstances will they do so? This answers the question: who else is in the market? Where – geographically – can consumers practicably turn for supply?

Step 2: Establish that the Firm Has a Dominant Position Direct evidence of market power Example: the Mylan case Inferring market power from market share Measures of market share Market entry conditions Other factors in assessing market power

Measures of Market Share Capacity – the number of units of a product a company has the potential to produce. Output – the number of units of a product a company actually produces. Sales – the number of units, or money value, of a product the company has actually sold. Reserves – for natural resources, the amount of a product a company has available to mine, harvest, or extract.

Market Entry Conditions Entry conditions is one of the most important factors in assessing market power. If entry into the market is relatively easy and inexpensive, even a large market share will not give a company market power.

Other Factors in Assessing Market Power Excess capacity Dynamic or stable market Production characteristics (fixed or flexible) Relative size in the market Government regulation

Factors that May Not Be Relevant in Assessing Market Power Size alone Profits alone Brands Intellectual property Product diversification Stable market shares over time

Step 3: Identify the Business Practice that May Harm Competition Exploitative Practices – where a firm takes advantage of its dominant position by: Charging high prices Engaging in price discrimination Exclusionary Practices – where a company attempts to create or maintain its dominant position by suppressing competition through: Predatory pricing Exclusive contracts

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?

The Challenge 1.To be guilty of an abuse of dominance a firm must have a dominant position. But merely having a such a such position does not violate the law. 2. The law does not prohibit everything that a firm with a dominant position does. 3. Harm to a rival does not necessarily mean harm to competition. 4. In practice, it is often difficult to distinguish between illegal abuse of dominance and hard-fought competition.