PANEL II

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PANEL II

• Criteria Used to Assess The Durability of Market
  Power

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Durability of Dominance and Identifying Entry
Barriers and Competitive Effects in Practice
Presented through a not-so-scenic tour of
Jersey, Channel Islands

• ICN Unilateral Conduct Workshop, Panel II,
  Washington DCMarch 23, 2009

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-Assume the presence of a dominant firm making
monopoly profits
Classic Economic Theory Entry restores
effective competition
Key QuestionWill it happen in practice?
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The Costs of Entry (I)
Establishment
Access to Labor/Expertise
Facilities

• Capital Investments
• Sunk Costs?

Access to Capital
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The Costs of Entry (II)

• Potential bottlenecks
• Supply Chain
• Access to Markets

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Legal Considerations
Potentially, Sector Regulation
National Laws
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Incumbents

• Network Effects?
• Legacy of State ownership?
• Vertical Integration?
• Reputation of incumbents?

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Customers/Consumers

• Barriers to Switching?
• Search Costs?
• Preferences?

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Ultimately Will New Competition Restore a
Competitive Market?
?
For the Potential New Entrant Is there a
profitable business case?
For the Competition Law Enforcement Agency Entry
timely, likely, sufficient? Other market factors
relevant? Is dominance entrenched?
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Panel II Speakers

• Dr. Simon Roberts
• Chief Economist and Manager, Policy and Research
  Division, Competition Commission South Africa
• Jacques Steenbergen
• Director General, Belgian Competition Authority
• Ronald A. Stern
• Vice President Senior Competition Counsel,
  General Electric Company
• Charles Webb
• Executive Director, Jersey Competition Regulatory
  Authority

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Durability of dominanceJacques
Steenbergendirector general

• ICN Unilateral conduct workshop Panel II
• Washington DC, March 23, 2009

Belgian Competition Authority Directorate General
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Durability of dominance an ambiguous issue

• Durability is a specific concern in case it
  increases the risk of abuse
• Exclusionary practices
• Exploitative abuses
• Discrimination
• Durability is also a specific concern when it is
  the result and/or evidence of abusive practices
  that aimed at the strengthening of a dominant
  position
• Durability of dominance makes abuses more serious
  and exclusionary abuses are in turn likely to
  enhance durability it is an element of
  assessment/evidence

Belgian Competition Authority Directorate General
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Durability of dominance an ambiguous issue (2)

• But durability is as such not a constitutive
  element of an infringement of the rules of
  competition, just as dominance does as such not
  constitute an infringement
• Because of an ambiguous attitude to dominance, we
  inevitably also have an ambiguous attitude to its
  durability
• And we can not exclude that durability mainly
  points to consistent competitive success
• It must be assessed in the context of the
  assessment of dominance and abuse

Belgian Competition Authority Directorate General
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Assessment of durability

• Assessment of dominance see best practices
• Assessment of durability mainly assessment of
  barriers to entry (see presentation of Chuck
  Webb)
• Assessment of the causes of durability only
  relevant to the extent that
• Durability is a specific concern
• The causes need to be addressed as such
  regardless of the specificities of the unilateral
  conduct case evaluation of the regulatory
  environment and state action

Belgian Competition Authority Directorate General
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Durability of dominance and liberalization the
case of incumbents

• The (former) monopolists can only lose market
  share are they (still) dominant?
• Sunk costs and written-of investments
• The technology timeline
• Price squeezes caught between consumer welfare
  and competitor protection?
• The unilateral conduct equivalent of sticky
  pricing?
• (See further the presentation of Simon Roberts)

Belgian Competition Authority Directorate General
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ICN Unilateral Conduct Workshop

• Assessing Whether A Firm is Dominant The Role
  of Other Market Criteria

Ronald A. Stern Vice President Senior
Competition Counsel General Electric
Company March 23, 2009
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ICN Workshop Other Market Criteria
Engines for Large Regional Jets (70-90
Passengers)
GE Honeywell Rolls Royce Pratt Whitney
1. Overall Installed Base 40-50 40-50 0-10 0
2. Installed Base of Aircraft in Production 60-70 30-40 0 0
3. Order Backlog on Aircraft Not Yet in Service 90-100 0-10 0 0
Prior to the transaction, GE was
already dominant in this market.
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ICN Workshop Other Market Criteria

• How Does the Relevant Market Operate?
• Powerful Buyer Aircraft manufacturer
• Winner-take-all Bidding 1 engine selected
• Pricing Locked-In by contract for the life of
  the aircraft program

Key Issue Were there credible bidders when the
engine supplier was selected?
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ICN Workshop Other Market Criteria
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ICN Workshop Other Market Criteria

• Existence of Credible Bidders
• Multiple engine firms competed for large regional
  jet opportunities GE or CFM RR SPW or PW
• RR and PW each had a track record of success in
  commercial aircraft engines generally and in
  adjacent markets (small regional jets 100-120
  seat large commercial aircraft)
• SPW JV won one of the large regional jet engine
  competitions

Dominance/substantial market power unlikely
despite extremely large market share
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ICN Workshop Other Market Criteria

• What Has Happened Since 2001?
• PW continued to invest in innovative geared fan
  technology
• Snecma continued to pursue regional jet engine
  opportunities separate from PW
• Three new large regional jet programs launched
• China Regional Jet (ARJ121) GE engine
• Russian Regional Jet (SSJ100) Snecma/Saturn JV
  engine
• Mitsubishi Regional Jet (MRJ) PW geared fan
  engine

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ICN Workshop Other Market Criteria

• Growing Market Share Approaching 100 May
• Not Equal Dominance/Substantial Market Power
• Examine how the relevant market works
• Assess other factors such as (1) powerful
  buyers, (2) bidding/winner-take-all contracts,
  (3) rivals success in adjacent markets, and (4)
  ongoing innovation by rivals
• Focus on whether there is evidence of a high
  decree of sustained pricing power the RPs
  definition of Dominance/Substantial Market Power

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Dominance, durability and state-created
monopolies

• ICN Unilateral Conduct Workshop
• Simon Roberts

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Introduction

• Durability of dominance is important in dominance
  assessment, and we are concerned with whether a
  firms dominant position is entrenched, and why
• Dangers of over-enforcement and chilling effects?
  - matters greatly how dominance was established
• A firms dominant position may be entrenched
  because of previous/ongoing state support, even
  though firms inefficiency and/or exercise of
  market power may mean there are some fringe
  competitors
• Dominant firm may have the power, incentive to
  engage in anti-competitive conduct to undermine
  effective competitive rivalry
• In many countries this is a big issue for
  competition authorities, compounded by relatively
  small markets, scale and scope effects, access to
  upstream markets/vertical integration etc.

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What should we be considering in state-created
monopoly?

• Ownership
• But state support is much wider
• Subsidies, finance
• Rights to infrastructure, inputs etc
• Past regulatory provisions, licencing (such as
  marketing boards and legal cartels, where there
  may have been regional allocations)
• Not-regulated today (i.e. not talking here of
  regulated natural monopolies)
• and
• Where the advantage bestowed is not transitory
• Relates to other considerations such as entry
  barriers, economies of scale/scope etc

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Illustrative Examples

• 1. Grain Silos
• Owned by former cooperatives which had received
  high levels of state support and subsidies, now
  private companies, providing wide-range of
  services and also engaged in trading of grain
• Large investments required to build silos
  (although alternatives being used silo bags)
• High local transport costs for grain
• Silo firms had set conditions linking farmers
  storage of grain to their own trading operations
• 2. Airlines (domestic flights)
• National carrier still state-owned with
  government capital injections, after failed
  privatisation, facing rivalry in local market in
  full service and low cost airlines
• Inducements to travel agents relating to
  sales/quotes of its flights over rivals
• Dominance? - Low cost and full service time
  sensitive travel (corporate market)?

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Examples cont.

• 3. Industrial chemicals fertilizer manufacture
• Countrys major chemicals company state-owned
  until 1990
• Continued to receive state support (incentives,
  infrastructure) advantageous access to inputs
  (natural gas pipeline supply)
• Pricing main fertilizer chemicals against an
  imported alternative fertilizer alleged
  exclusionary actions against downstream
  blenders/distributors/importers
• 4. Beer
• Incumbent brewer with c95 of market
• Not state-owned but historically very close links
  with state
• Entry barriers may appear low (scale economies
  etc), but issues of branding, distribution etc
• Various alleged exclusionary/restrictive
  conditions on distribution and retail outlets

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Implications?

• Avoid over enforcement / false positives
  wrongly finding abusive conduct
• this depends on the hurdle of dominance and on
  the criteria for finding abuse
• Under enforcement is much more likely in
  countries with small markets, given scale
  economies etc
• higher levels of state support in the past and
  present further reinforces this
• State support is one factor in comprehensive
  consideration of factors affecting competitive
  conditions in the market under investigation
• Defining dominance is first step in effective
  enforcement against anti-competitive conduct by
  firms with entrenched dominance, especially
  state-created monopolies

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PANEL II

• Criteria Used to Assess The Durability of Market
  Power

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BREAK
Webcast will resume at 435 PM