I. What does the indirect method for estimating market power consist of?
There are two methods to determine if an undertaking holds dominance, “direct” and “indirect”:
“The ‘direct’ method involves estimating the market power by using econometric methods, particularly the residual demand curve (the demand curve facing a single firm). This requires data which is often not available and even if it is the estimation of market power in this way may prove problematic, but it has considerable support amongst economists.”[1]
Most competition authorities around the world use the “indirect” method, which involves a structural approach, in assessing dominance. After defining the relevant market, they identify the competitors, and market shares are assigned to the market participants.[2] The size of a firm’s market shares, both in absolute terms and relative to those of its competitors, can be used in order to understand the degree of market power and existing competition in the market.[3]
It has been understood that where a company has small market shares, it is unlikely for it to have substantial market power. Likewise, very large market shares can be evidence of the existence of a dominant position.[4]
II. Are market shares enough?
Market shares may be useful to determine whether a company holds market power, but they should not be analysed solely. It is important to assess other market characteristics, such as the position of potential competitors and of buyers, and the relative size and strength of current competitors.[5] Altogether, it is important to consider all competitive conditions within the market, to evaluate whether buyers have options to purchase from alternative sources.[6]
Entry barriers are to be especially assessed. They can be an important determinant of the extent and persistence of market power,[7] as they enable a firm already in the market to earn monopoly profits without attracting other firms (i.e. potential competitors) to enter that market.[8]
Competitive constraints acting on undertakings may limit their ability to engage in unilateral or coordinated anticompetitive conducts. These constraints may be exerted either from the supply side (e.g. actual or potential competition) or from the demand side (e.g. buyer bargaining power). These constraints may be able to protect the market, deterring or defeating an attempt by the dominant undertaking to profitably increase prices.
[1] Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 55, para. 2.
[2] OECD, Competition Committee, “Market Definition”, DAF/COMP(2012)13/REV1, JT03326638 (2012), para. 21.
[3] Niels G, Jenkins H, and Kavanagh J, “Economics for competition lawyers” (2nd ed., Oxford University Press, 2016), p. 99, para. 3.18.
Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 55, para. 3.
[4] Case 85/76 Hoffman – La Roche & Co AG v Commission [1979] para. 41.
Case C-62/86 AKSO Chemie BV v Commission, [1991].
[5] Niels G, Jenkins H, and Kavanagh J, “Economics for competition lawyers” (2nd ed., Oxford University Press, 2016), p. 104, para. 3.31.
[6] OECD, Competition Committee, “Market Definition”, DAF/COMP(2012)13/REV1, JT03326638 (2012), para. 20.
[7] Niels G, Jenkins H, and Kavanagh J, “Economics for competition lawyers” (2nd ed., Oxford University Press, 2016), p. 99, para. 3.41.
[8] Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 56, para. 1.
Publication Notice
Responsible: Freie Universität Berlin, by its President.
Author: Natalia Fernández
Stage of work: completed
