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European competition policy - anti trust policy Abuses of a Dominant Market Position What is meant by a “dominant market position”? A firm holds a dominant position if its economic power enables it to operate on the market without taking account of the reaction of its competitors or of intermediate or final consumers. In appraising a firm's economic power in the marketplace, the EU Commission takes into account factors such as: • The firm’s market share • Whether there are credible competitors • Whether the firm has its own distribution network • Whether it has favourable access to key sources of supply (e.g. raw materials) • Whether the firm controls access to key technology or intellectual property necessary to compete in the market It is important to note that holding a dominant position is not wrong in itself if it is the result of the firm's own effectiveness. However, if the firm exploits a dominant position to stifle competition, this is deemed to be an anti-competitive practice which constitutes abuse. It is the abuse of the dominant position which is prohibited by Article 82 of the EC Treaty. The Commission can fine an offending firm up to 10 percent of its turnover Anti-Competitive Practices Anti-competitive practices are strategies operated by firms that are deliberately designed to limit the degree of competition in a market. Such actions can be taken by one firm in isolation or a number of firms engaged in some form of explicit or implicit collusion. Where firms are found to be colluding it would generally (not exclusively) not seen to be in the public interest) The EU Competition Commission under Mario Monti has been extremely pro-active in investigating allegations of cartel behaviour among businesses within the single market. Since 1998 there have been numerous investigations in industries such as chemicals, banks, airlines, beer, paper production and computer games. Market share is a zero-sum game! Competitive processes inevitably involve intense rivalries between firms in which they attempt - normally in an impersonal way - to injure one another. When one firm cuts the price of its product, it does so in the knowledge that it will probably take market share from a competitor. The introduction of new products has the same purpose. The observation that one firm's conduct has a detrimental effect on another is not enough to show anti competitive behaviour. It is normally the sign of the normal working out of the forces of competition. Thus it is not easy to identify anti -competitive practice from pro competitive behaviour (this is true at a European and a national level). Arguments in favour of competition (and thus banning anti competitive practices) The standard monopoly versus competition diagram can be used to show that, given 'similar cost conditions, prices will be lower and output higher in a competitive market than a monopoly market. There is also likely to be greater choice. This leads to an increase in consumer surplus and as such, a move away from producer sovereignty towards consumer sovereignty. Abnormal (supernormal) profit will be reduced (effectively transferring income from shareholders to households. A more efficient allocation of resources results since monopoly involves P>MC at the profit maximising output whereas under competition, profit margins are reduced and prices paid by consumers are closer to the factor cost of production Anti Competitive Practices can take a number of forms, many of which are subtle (they are obviously trying not to catch the attention of the competition authorities!). Examples would include (but not exhaustive): Predatory pricing financed through cross-subsidization (not all price discrimination is anti competitive though – much of it is simply a genuine attempt to remain competitive in a market) Firms who have market power in more than one market may set prices below cost in one period in order to drive out rivals and restrict entry. Having done so, it once again raises price – this is predatory pricing Vertical restraint in the market: (i) Exclusive dealing This occurs where a retailer undertakes to sell only one manufacturer's product and not the output of a rival firm. These may be supported with long term contracts which bind a retailer to a supplier and can only be terminated by the retailer at great cost. Distribution agreements may seek to prevent parallel trade between EU countries (e.g. from lower-priced to higher priced countries) – this lay at the heart of the decision by the EU to fine Nintendo in October 2002 (ii) Territorial exclusivity Territorial exclusivity happens when a particular retailer is given sole rights to sell the products of a manufacturer in a specified area. (iii) Quantity discount Where retailers receive progressively larger discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's (iv) A refusal to supply Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all Creation of artificial barriers to entry: Through high advertising, brand proliferation. Collusive practices: These might include market sharing, price fixing and agreements on types of goods to be produced. Practices not deemed to be anti-competitive by the EU Practices are not prohibited if the respective agreements "contribute to improving the production or distribution of goods or to promoting technical progress in a market. Examples: • Development of industry standards; • Research joint-ventures and know-how agreements; |