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 frameworkPredation/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 High prices? Legal framework Predation/exclusion 4Abuse of dominance Discrimination?Dominance EU:>50% => presumption of dominance OFT: “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 High prices? Legal framework Predation/exclusion 5Abuse of dominance Discrimination?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. High prices? Legal framework Predation/exclusion 6Abuse of dominance Discrimination?Dominance

Discrimination? Only an abuse under CA if it has an anti- competitive effect. e.g. London Electricity caseLondon Electricity case so might be considered a category of predation High prices? Legal framework Predation/exclusion 7Abuse of dominance Discrimination?Dominance

Abuse of dominance8

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Which jurisdiction(s) does not require notification of intended mergers? Mergers10 1.EU 2.UK 3.Applies to both 4.Applies to neither

What is the relevant market for case A? 11 1.X 2.Y 3.Z 4.Contradictory/unclear X Y Z AX: -1.8Y: -1.0Z: -0.5

What is the relevant market for case B? 12 BX: -0.4Y: -1.5Z: -5.6 X Y Z 1.X 2.Y 3.Z 4.Contradictory/unclear

What is the relevant market for case C? 13 CX : -7.4Y: -6.1Z: -2.0 X Y Z 1.X 2.Y 3.Z 4.Unclear/ contradictory

Case D? 14 DX: -12Y: -2.1Z: X 2.Y 3.Z 4.contradictory/unclear

LOOK AT CRITICAL LOSS ANALYSIS DISCUSSION Abuse of dominance15

Predatory pricing See detailed notes on web site "Conduct by a dominant firm designed to eliminate, restrict, or deter competition” High prices? Legal framework Predation/exclusion 16Abuse of dominance Discrimination?Dominance

Predatory pricing Basic idea: 1. Entry occurs into concentrated market 2.Incumbent lowers price 3. Entrant leaves 4. Incumbent raises prices again Effect is exclusionary, and interferes with “normal” process of market entry and competition High prices? Legal framework Predation/exclusion 17Abuse of dominance Discrimination?Dominance

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Predatory pricing McGee query: Can predation be profitable? -See.rtf notes Does it cost the incumbent more than the entrant? -depends on model of behaviour, etc. - and symmetry, or otherwise High prices? Legal framework Predation/exclusion 19Abuse of dominance Discrimination?Dominance

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Predatory pricing Asymmetries may make predation plausible: – Finance – Reputation – Cost asymmetry – Demand – possible scope economies High prices? Legal framework Predation/exclusion 21Abuse of dominance Discrimination?Dominance

Predatory pricing Price tests: Areeda-Turner: p<SRMC (proxied by AVC) Williamson: expansion of output on entry (see fig 3 for a counterexample) Baumol price increase on exit Ordover and Willig: profitable absent exit? High prices? Legal framework Predation/exclusion 22Abuse of dominance Discrimination?Dominance

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).” High prices? Legal framework Predation/exclusion 23Abuse of dominance Discrimination?Dominance

Cutting price to drive out a new entrant will be profitable.. 1.Always 2.Never 3.As long as products are differentiated 4.If products are homogeneous 5.Possibly if there are sufficient asymmetries

What kind of firm is A (E=-8.5) 25 1.Simple monopoly 2.Perfect competition 3.Monopolistic competition 4.Regulated monopoly

What kind of firm is B (E=-1.8) 26 1.Simple monopoly 2.Perfect competition 3.Monopolistic competition 4.Regulated monopoly

What kind of firm is C (E=-0.5) 27 1.Simple monopoly 2.Perfect competition 3.Monopolistic competition 4.Regulated monopoly

SEE COMFY BUS CASE Abuse of dominance28