It has been understood that a dominant undertaking has a high level of economic strength, which enables it to fix prices above short-run marginal cost and, in the long run, above average total cost[1]. These undertakings act independently of almost every other agent in the market, for they have little to none competitive constraints.[2] There are two methods to determine if an undertaking holds this kind of market power, “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.”[3]
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[4]. 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.[5]
It has been understood that where a company has small market shares, it is unlikely it has substantial market power. Likewise, very large market shares can be evidence of the existence of a dominant position.[6]
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.[7] All and all, it is important to consider all competitive conditions within the market[8].
Entry barriers are to be especially weighed. They can be an important determinant of the extent and persistence of market power.[9] They enable a firm already in the market to earn monopoly profits without attracting other firms to enter that market.[10]
[1] Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 54, para. 4.
[2] Case 85/76 Hoffman – La Roche & Co AG v Commission [1979] para. 38.
[3] Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 55, para. 2.
[4] OECD, Competition Committee, “Market Definition”, DAF/COMP(2012)13/REV1, JT03326638 (2012), para. 21.
[5] 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.
[6] Case 85/76 Hoffman – La Roche & Co AG v Commission [1979] para. 41.
Case C-62/86 AKSO Chemie BV v Commission, [1991].
[7] Niels G, Jenkins H, and Kavanagh J, “Economics for competition lawyers” (2nd ed., Oxford University Press, 2016), p. 104, para. 3.31.
[8] OECD, Competition Committee, “Market Definition”, DAF/COMP(2012)13/REV1, JT03326638 (2012), para. 20.
[9] Niels G, Jenkins H, and Kavanagh J, “Economics for competition lawyers” (2nd ed., Oxford University Press, 2016), p. 99, para. 3.41.
[10] Jones A, and Sufrin B, “EU Competition Law” (6th ed., Oxford University Press, 2016), p. 56, para. 1.
Publication Notice
Responsible: Freie Universität Berlin
Author: Natalia Fernández
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