Assessment of Dominance (SMP) for Relevant Markets Susceptible to ex-ante Regulation. Peter Alexiadis Partner Gibson, Dunn & Crutcher LLP/Brussels Office A presentation for the ITS 15 th Biennial Conference Berlin, 4-7 September 2004

2 Table of Contents I. Individual Dominance II. Collective Dominance III. Leveraged Dominance IV. Conclusions

3 I. Individual Dominance Legal Standards of Dominance “The dominant position referred to in Article [82] 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, its customers and ultimately consumers”. Case 27/76, United Brands v. Commission “The existence of a dominant position may derive from several factors, which, taken separately, are not necessarily determinative but among these factors a highly important one is the existence of very large market shares”. Case 85/76, Hoffmann-La Roche / Commission [Other factors include: size of operations, wide geographical presence, financial resources, vertical integration, product range, essential facilities.]

4 I. Individual Dominance Legal Standards of Dominance “… although the importance of the market shares may vary from one market to another the view may legitimately be taken that very large market shares are in themselves, and save in exceptional circumstances, evidence of a dominant position.” Case 85/76, Hoffmann-La Roche / Commission “Without going into a discussion about percentages … [dominance] must be determined having regard to the strength and number of the competitors”. Case 27/76, United Brands v. Commission

5 Criteria of dominance emerging from case-law and administrative practice Market shares Degree of dependence of customers or suppliers The structure of the firm itself Technological resources Production capacity Access to raw materials Financial strength The conduct of the firm on the market I. Individual Dominance The structure of the relevant market

6 Relevance/Limitations of Market Shares Proxy for market power (extent of negative impact on the market) Absolute market shares > 40% > 50% Relativity of market shares Stability/volatility “In” and “for” the market (innovative markets) No substitute for full economic analysis I. Individual Dominance

7 Immediate/Actual Competitive Constraints (1) Number of competitors / size / gaps Efficiencies of competitors Raising rivals’ costs Existing regulatory obligations Switching costs Market share movement Barriers to expansion Effectiveness of actual competition I. Individual Dominance Profitability / ROCE Network Effects

8 Immediate/Actual Competitive Constraints (2) Competitors compared to market leader with Absolute size / “deep pockets” Technological advantages Access to capital Sales / marketing relationships IP rights Vertical integration / control of infrastructure Economies of scale / scope Market conduct Information asymmetries I. Individual Dominance Firm cultures

9 Countervailing Bargaining Power Nature of buyer Customer knowledge / indifference / information asymmetries Switching costs Efficiencies of customer response (theoretical/actual) I. Individual Dominance Wholesale / retail Individuals / groups

10 Potential Competition Entry Barriers / Exit Barriers Innovation characteristics History of new entry / effects of new entry Sustainable entry or expansion / associated risks / costs of entry Likely response of dominant firm I. Individual Dominance Regulatory Strategic Timeframe for analysis / likelihood of entry Shifts in value / incentives to integrate / incentives to consolidate

11 Market Share Evaluation (Empirical issues) Data Sources Parties, competitors, customers, buyers, suppliers, trade associations, market research report MeasurementsRevenues, volumes, production capacities, inputs depending on markets concerned and available data I. Individual Dominance

12 Level of Assessment – Examples from the Consultation Process Austria / Fixed transit services -> Market shares / Alternatives to ubiquitous network in absence of regulation. UK / Call termination on individual fixed networks -> Monopoly provider / Barriers to entry (cost efficiencies) / BT’s countervailing buyer power. I. Individual Dominance UK / Leased lines markets -> Market shares (high and stable) / Technological advantages or superiority / Barriers to entry / Economics of scale and scope / Absence of countervailing buyer power / Lack of actual and potential competition / Evidence from international benchmarking. Austria / Mobile access and call origination -> Decreasing market share / High entry barriers / No barriers to expansion (finance / infrastructure / technology / vertical integration of competitors) / High level of substitutability / Market transparency / Degree of countervailing buyer power. UK / Mobile voice call termination on individual networks -> Market share / Entry barriers / Excessive prices and profitability / Countervailing buyer power & “calling party pays” arrangements / Need to take into account pricing behaviour.

13 I. Individual Dominance Level of Assessment – Examples from the Consultation Process Finland / Leased lines markets -> Market shares / Control over infrastructure / Vertical and horizontal integration / Actual and potential competition / Product range / Established customer relations / Economic strength. Finland / Call termination on individual mobile networks -> 100% market share / Control over network / Horizontal integration / Lack of actual and potential competition / Financial strength. Finland / Mobile access & call origination -> 60% market share relative to competitors (29 : 10.5 : 0.1%) /High entry barriers / Economics of scale & scope and financial strength / Relationship with ISP / No countervailing buyer power. Finland / Public fixed telephony for residential & non-residential customers -> Market shares / Prices / Other market data / Lack of consideration of existing remedies. Finland / Public fixed international telephony for residential & non-residential customers -> Market shares / Existing remedies.

14 Level of Assessment – Examples from the Consultation Process Ireland / Broadcasting transmission services -> Market shares / Barriers to entry / Absence of countervailing bargaining power / Lack of potential competition / Evidence of market behaviour. I. Individual Dominance Ireland / WBA -> Market shares relative to competitors / Market entry / Vertical integration / Credible alternatives. Portugal / Retail markets for fixed telephony -> Market shares / HHI concentration index / Overall size of market leader / Barriers to entry and expansion / Absence of countervailing bargaining power / Profitability. Portugal / Fixed call origination & call termination on public telephone networks -> For origination: same criteria as for retail markets (above) For termination: Monopoly position / Price levels / History of regulation / Profitability / Absence of countervailing bargaining power. Greece / Call termination on individual mobile networks -> Market shares / Monopolistic market structure / Absence of potential competition (barriers to entry / technological alternatives / structural changes in market) / Low countervailing buyer power / Anti-competitive practices.

15 II. Collective Dominance Discussion Items Varying Approaches in different legal instruments such as Merger Regulation, Framework Directive, Article 82 EC - different policy directions Legal & Economic Concepts Identification of Essential Elements Burdens of proof under different legal instruments Article 82 Dominance / Conduct Merger Regulation Dominance / ??? Framework Directive Dominance / Conduct

16 Definitions Collective/joint/oligopolistic Concept of tacit collusion A group of firms able to adopt through implicit collusion a common policy on the market and to act to a considerable extent independently of their suppliers & customers Frequently examined in communications sector – Vodafone/Airtouch, FT/Orange, BT/ESAT Telecom, MCI WorldCom/Sprint, Roaming Enquiry National cases: Meridian/Eircell, Telia Finland II. Collective Dominance

17 Essential Elements Incentive compatibility Credibility of co-ordination Market concentration Repeated interaction between firms Barriers to entry/exit Market transparency Retaliation measures Lack of effective competitive constraints II. Collective Dominance

18 Market Concentration Relationship between no. market players & respective market shares Less market share spread/less no. market players – greater competition concerns Greater no. of competitors increases complexity of interrelationships Individual market shares/market share symmetries/relative market shares Market share litmus test difficult to identify Market share comparisons relevant where markets have “fundamentally similar characteristics” Increasing use of economic indices e.g. HHI of Concentration Index II. Collective Dominance

19 Repeated Interaction Interconnection Relationships Trade Associations Commercial Contacts II. Collective Dominance

20 Collective dominance not of concern in markets with low entry barriers Barriers to entry/exit Anti-competitive prices would trigger market entry (long term or “hit and run” basis) Technological barriers (e.g., local loop) Legal barriers, e.g., spectrum and limited no. of licences Regulatory barriers, e.g., price controls Strategic entry barriers, e.g., long-term customer contracts II. Collective Dominance

21 Market Transparency Each member must have the ability to know how other members are behaving in order to adopt a common policy. “Sufficiently quickly & precisely” (Airtours) Age of information being exchanged Transparency of additional factors (production capacity, sales, investments) Price transparency Actual prices & rates Other market information from which prices of sales can be derived Public price lists, discount policies, inter-firm transfers, industry association publications, customer feedback Price transparency & common costs Homogenous products II. Collective Dominance

22 Lack of Effective Competitive Restraints Actual Competitors Market Entry Customers Unwillingness to tacitly collude Cost/quality considerations; varying profit strategies or other asymmetries Recent new entry can have a destabilising effect Barriers to expansion Supra-competitive profits attract market entry Low barriers to entry/exit Innovation Maturity of marketplace Other structural characteristics Purchasing power Awareness II. Collective Dominance

23 Retaliation Measures “Cheating” firms must be capable of being retaliated against Variety of retaliation mechanisms Effectiveness of measures dependent on various factors Reversion to normal competition Price wars, targeted action or other legitimate business activities Time period for competitor reaction Frequency of interactions (e.g., price adjustments or access negotiations) Structural elements of market (e.g., long term customer constraints) Profit maximisation (e.g, short term/long term) Whether market characterised by cost or quality synergies II. Collective Dominance

24 Level of Assessment Dynamic vs. static approach Margin of discretion Purpose of various instruments: Article 82 EC, Merger Regulation, or Framework Directive Rigorous economic analysis vs. checklist approach II. Collective Dominance

25 Level of Assessment – Examples from the Consultation Process Austria / Mobile access & call origination -> Decreasing concentration ratio / Asymmetric market share distribution (47 : 25 : 20%) / No evidence of foreclosure – cooperation agreements and airtime resale agreements negotiated commercially. UK / Mobile access & call origination -> Derived market shares from retail level / Market shares measured in terms of subscriber numbers, call minute volumes, revenues, etc. - relevance of figures / International benchmarking of concentration measures – relevance of HHI measures. II. Collective Dominance

26 AIRTOURS – Case Example Collective Dominance test: 1. Transparency allowing monitoring 2. Existence of a punishment mechanism 3. Taking into account of reactions of customers and competitors undermining benefits of collusion  Need of “convincing evidence” based on review of level of competition” at the time of notification  Must not confuse acceptable oligopolistic interaction with tacit coordination (e.g., “cautious” capacity settlements)  Relevance of market change through acquisition  Avoidance of a “checklist” approach; need for factors to facilitate coordination II. Collective Dominance

27 III. Leveraged Dominance Authority Article 14(3) Framework Directive Clause 3.1.1, SMP Guidelines Case-law Remedies discussion, Relevant Markets Recommendation

28 TETRA – Case Example Leverage test: 1. The competitive harm flowing from conglomerate mergers is inherently more difficult to predict than cases of traditional horizontal mergers. Accordingly, a strong economic and factual analysis of affected markets is required to substantiate an allegation of leveraging of dominance. 2. Leverage theories continue to have a role to play in merger cases. In this regard, technological ties or product bundling through discounting might be the result of the leveraging of dominance, but:  the ability of a firm to leverage does not mean it will have the economic incentive to do so;  it will often not be profitable for a firm to extend a strong position in a market to another;and  the importance of alternative ex post remedies (e.g., under Article 82 EC) should be taken into account. III. Leveraged Dominance

29 IV. Conclusions  Commission review is thorough. It is not a rubber-stamping exercise.  No substitute for economic analysis on the part of the NRA.  Market share data needs to be interpreted carefully.  Different emphases regarding factors relevant to wholesale and retail markets.  Impact of self-supply issues on SMP assessment.