bsc economics and related programmes economics of competition and regulation ec 3015 week 5: abuse...
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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 framework Predation/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:<50% => “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 case• so might be considered a category of
predation
High prices?Legal framework Predation/exclusion
7Abuse of dominance
Discrimination? Dominance
Which jurisdiction(s) does not require notification of intended mergers?
Mergers 10
EU UK
Applies t
o both
Applies t
o neither
16%11%
5%
68%
1. EU2. UK3. Applies to both4. Applies to neither
What is the relevant market for case A?
11
X Y Z
Contradict
ory/uncle
ar
56%
11%
28%
6%
1. X2. Y3. Z4. Contradictory/unclear
X
YZ
A X: -1.8 Y: -1.0 Z: -0.5
What is the relevant market for case B?
12
X Y Z
Contradict
ory/uncle
ar
0%
50%
28%22%
B X: -0.4 Y: -1.5 Z: -5.6
XY
Z
1. X2. Y3. Z4. Contradictory/unclear
What is the relevant market for case C?
13
X Y Z
Uncle
ar/ co
ntradict
ory
21%
11%
42%
26%
C X : -7.4 Y: -6.1 Z: -2.0
X
YZ
1. X2. Y3. Z4. Unclear/
contradictory
Case D?
14
X Y Z
contra
dictory/
unclear
6%11%
22%
61%
D X: -12 Y: -2.1 Z: -0.5
1. X2. Y3. Z4. contradictory/unclear
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 market2 .Incumbent lowers price3. Entrant leaves4. 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
Predatory pricing
McGee query:Can predation be profitable?-See .rtf notesDoes 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
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)
Baumolprice 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..
Alw
ays
Nev
er
As
long
as
prod
ucts
a..
If p
roduct
s ar
e hom
o...
Poss
ibly
if th
ere
are
s...
5%0%
58%
26%
11%
1. Always2. Never3. As long as products
are differentiated4. If products are
homogeneous5. Possibly if there are
sufficient asymmetries
What kind of firm is A (E=-8.5)
25
Simple m
onopoly
Perfect
competition
Monopolis
tic competition
Regulated m
onopoly
0%
24%
43%
33%
1. Simple monopoly2. Perfect competition3. Monopolistic
competition4. Regulated monopoly
What kind of firm is B (E=-1.8)
26
Simple m
onopoly
Perfect
competition
Monopolis
tic competition
Regulated m
onopoly
33% 33%
19%14%
1. Simple monopoly2. Perfect competition3. Monopolistic
competition4. Regulated monopoly
What kind of firm is C (E=-0.5)
27
Simple m
onopoly
Perfect
competition
Monopolis
tic competition
Regulated m
onopoly
5%
43%
24%29%
1. Simple monopoly2. Perfect competition3. Monopolistic
competition4. Regulated monopoly