Criterion

Implication for assessment of market power

Market shares

Market shares are not conclusive on their own. Suppliers with market shares below 25% are not likely to enjoy single dominance. According to case law a market share over 50% would lead to a presumption of dominance. In the European Commission’s decision-making practice, single dominance concerns normally arise where an undertaking has at least a 40% market share. However, there may still be concerns about dominance where an undertaking has less than 40%, according to the size of that undertaking’s market share relative to its competitors.

The persistence of a high market share over time is an important factor. The ease with which new entrants might erode that market share and the relative shares of competitors are also relevant. A declining market share may indicate rising competition, but this does not preclude a finding of dominance.

Where markets are emergent or growing more quickly, high market shares are less indicative of market power than in more mature or slow-growth markets. Fluctuations in market shares may also indicate a lack of market power.

Market shares may be assessed by volume or value of sales. The appropriate measure will vary between markets, although it is likely that the most appropriate measures will be volume for bulk products (eg wholesale conveyance minutes), and value for differentiated (branded) products (eg retail mobile products). Where a firm has a higher share by value than by volume it may indicate that it can price above rivals due to market power.

Overall size of the undertaking

This refers to the potential advantages, and the sustainability of those advantages, that may arise from the large size of an undertaking relative to its competitors. Areas where such advantages may exist include economies of scale ( see also separate criterion below) ; finance; purchasing; production capacities; and distribution and marketing. Such advantages may accrue in part due to other activities of the undertaking outside of the market under consideration.

Control of infrastructure not easily duplicated

One example is control/ownership of a large network that a competitor would find costly and time-consuming to build. Such control may represent a significant barrier to entry.

Technological advantages or superiority

Such advantages may represent a barrier to entry as well as an advantage over existing competitors.

Absence of or low countervailing buying power

The existence of customers with a strong negotiating position, which is exercised to produce a significant impact on competition, will tend to restrict the ability of providers to act independently of their customers.

Such power is more likely where a customer accounts for a large proportion of the producer’s total output, is well-informed about alternative sources of supply, is able to switch to other suppliers readily at little cost to itself, and where it may even be able to begin producing the relevant product itself.

Easy or privileged access to capital markets/financial resources

Such access may represent a barrier to entry as well as an advantage over existing competitors.

Product/services diversification (eg bundled products or services)

Bundling may support dominance by foreclosing the market for part of the bundle to other suppliers, even where the different elements of the bundle are supplied separately. By bundling a service in the supply of which it is dominant with that of another service for which the market is at least potentially competitive, an operator with SMP can exclude rivals and so lever its dominance from the former to the latter market.

Economies of scale

Economies of scale arise when increasing production causes average costs to fall. Economies of scale are common where the production process involves high fixed costs. One other way in which increasing scale can lower unit costs is by allowing greater specialisation, and in turn higher productivity.

Economies of scale can act as a barrier to entry as well as an advantage over existing competitors.

Economies of scope

Economies of scope exist where average costs for one product are lower as a result of it being produced jointly with another product by the same firm. Cost savings may be made where common processes are used in production.

Economies of scope are common where networks exist, as the capacity of the network can be shared across multiple products. Economies of scope can be a barrier to entry as well as an advantage over existing competitors.

Vertical integration

Vertical integration can promote dominance in two ways

• by making new market entry harder due to control of upstream or downstream markets
• through the potential ability to lever market power into upstream or downstream markets, thereby adversely affecting competition

A highly developed distribution and sales network

Well-developed distribution systems are costly to replicate and maintain, and may even be incapable of duplication. They may represent a barrier to entry as well as an advantage over existing competitors.

Absence of potential competition

This refers to the prospect of new competitors entering the market within the timeframe considered by the review. The record of past entry is one factor that can be looked at, as well as potential barriers to entry such as those under ‘Ease of market entry’ below.

Barriers to expansion

There may be more active competition where there are lower barriers to market growth and expansion. However, the higher the barriers to entry into the market, the less significant the absence of barriers to expansion will be in assessing competition, because with high barriers to entry competition is less likely to extend beyond the existing market players.

Ease of market entry

The threat of potential entry may prevent incumbent firms from raising prices above competitive levels. However, if there are significant barriers to entry, this threat may be weak or absent. Incumbent operators may then be able to raise prices and make persistent excess profits without attracting additional competition that would reduce them again.

The impact of these barriers is likely to be greater where the market is growing slowly and is initially dominated by one large supplier, as entrants will be able to grow only by attracting customers from the dominant firm. However, barriers to entry may become less relevant where markets are associated with ongoing technological change and innovation.

Structural barriers plus any evidence of both potential and actual entry are relevant to the assessment, although lack of entry may also be a rational decision given price signals and potential profits. For example, not enough customers may be willing to switch given the level of potential savings available. Reviews should consider whether there is evidence that new competitors might have a significant impact within the time frame considered by the review.

There are two broad categories of barriers to entry - strategic and absolute. Absolute barriers exist where firms own, have access to, or are granted privileged use of important assets or resources which are not similarly accessible to potential entrants. Strategic barriers arise due to the strategic behaviour of existing market players, for example through pricing behaviour (such as predatory pricing, price-squeezing, cross-subsidies and price discrimination) or through non-price behaviour (such as increased investment, promotion and distribution). Whilst structural and behavioural aspects can be interwoven, making the absolute-strategic distinction may better indicate the appropriate remedies to apply to address dominance.

Sunk costs can be an important barrier to entry. These are costs which are needed to enter an industry but which cannot be recovered on exit – for example investment to set up a production plant or to build a network. Existing firms, which only have to cover ongoing costs, could set prices too low to allow entrants to both recover sunk costs and compete.

Other potential barriers to entry are cited among the criteria listed above. Further examples are: patents and other intellectual property rights; legislative or other regulatory requirements; brand image (including high advertising); and distribution agreements.

Criterion

Implication for assessment of collective dominance

Market concentration

Collective dominance is more likely in a highly concentrated market. However, even where a market is highly concentrated it does not necessarily warrant a finding that the structure of the market is conducive to collective dominance in the form of tacit co-ordination.

Transparency

A situation where companies can easily obtain good knowledge of their competitors’ prices and customers is more conducive to collective dominance.

Mature market

In more mature markets, it is harder to enter the market and attract new customers.

Stagnant or moderate growth on the demand side

The faster demand is growing, the more likely providers are to compete aggressively due to the potentially higher returns available in terms of future market share and profits.

Low elasticity of demand

Where customer demand does not change much in response to price changes, there is less incentive to reduce prices in order to undercut competitors. Elasticity of demand may be low for various reasons, including low importance of the product in customers’ total spending. Some other potential reasons appear in Table 3 below, under the ‘Barriers to switching’ and ‘Consumers’ ability to access & use information’ criteria.

Homogenous product

The more similar the products, or the more similar they are perceived by customers, the stronger the potential for price competition between providers which may increase the incentive to collude.

Similar cost structures

Similar cost structures would make muted price competition easier, as for a given price level similar costs will produce similar levels of profit

Similar market shares

Large imbalances of market share between suppliers may make collective dominance less likely. Behaviour that limits competition may be more likely where market shares are similar. A situation of static market shares may result from collusion or muted competition.

Lack of technical innovation, mature technology

The more mature the technology, the lower the scope for providers to compete by being differentiated on technology grounds.

Absence of excess capacity

Absence of excess capacity would tend to make it easier to maintain an anti-competitive agreement, as providers would not have an incentive to break an agreement by using their excess capacity to produce at a lower price, and in so doing make more profit overall.

High barriers to entry

Barriers to entry are covered in Table 1 above, mainly under the ‘Ease of market entry’ criterion.

Lack of countervailing buying power

The existence of customers with a strong negotiating position, which is exercised to produce a significant impact on competition, will tend to restrict the ability of providers to act independently of their customers.

Such power is more likely where a customer accounts for a large proportion of the producer’s total output, is well-informed about alternative sources of supply, is able to switch to other suppliers readily at little cost to itself, and where it may even be able to begin producing the relevant product itself.

Lack of potential competition

This refers to the prospect of new competitors entering the market within the timeframe considered by the review. The record of past entry is one factor that can be looked at, as well as potential barriers to entry such as those under ‘Ease of market entry’ in Table 1 above.

Various kind of informal or other links between the undertakings concerned

Evidence of such links will inform an assessment of the potential for collusion. However such evidence is not a pre-requisite for finding a collectively dominant position. For example, links may exist to legitimately resolve common issues through self-regulation.

Patterns of price movements are one piece of evidence that might indicate concerted action by firms.

Retaliatory mechanisms

Such mechanisms can deter action that might break collective agreements. An example of such a mechanism would be a credible threat of stronger price competition that would impact unequally upon providers. In this example, a provider that would be likely to suffer more than at least some competitors were an agreement to be broken and retaliatory price competition ensued would be less likely to try to break that agreement.

Lack of or reduced scope for price competition

If competition were effective, one would generally expect to see prices close to or moving towards cost. But the potential for tough price competition can create an incentive not to compete actively. An assessment of some of the other collective dominance criteria may also indicate limited scope for price competition. So a potential result of collective dominance is evidence of a history of market price movements within a narrow range

Criterion

Implication for assessment of market power

Excess pricing and profitability

The ability to price at a level that keeps profits persistently and significantly above the competitive level is an important indicator of market power. The EC Guidelines (paragraph 73) refer to the importance, when assessing market power on an ex-ante basis, of considering the power of undertakings to raise prices without incurring a significant loss of sales or revenue.

In a competitive market, individual firms should not be able to persistently raise prices above costs and sustain excess profits. As costs fall, prices should be expected to fall too if competition is effective.

Factors that may explain excess profits in the short term, such as greater innovation and efficiency, or unexpected changes in demand, should however be considered in interpreting high profit figures. Conversely, low profits may be more an indicator of the inefficiency of the firm than of effective competition.

Lack of active competition on non-price factors

Non-price competition refers to differentiation between products and providers. Differentiation may be both vertical (differences in quality) and horizontal (differences in terms of variety). The impact of differentiation will be greater to the extent that customers fully perceive the differences that providers are promoting.

More differentiation may be expected where customer priorities are more oriented to quality and features of their service relative to low prices.

In practice, the practical difficulties of monitoring retail offerings in detail may limit the analysis on this criterion to a very general level.

Barriers to switching

Limited customer ability to switch between providers increases the extent to which providers can act independently of their existing customers.

Barriers might exist on the demand side or be maintained by suppliers. The former include the cost and practical difficulty of switching relative to the potential benefits, and customers’ awareness of both their ability to switch and the procedures involved. Other potential barriers are the perceived quality of service and reputation of alternative suppliers, and customers’ reluctance to take risks with alternative providers.

Customers’ ability to access & use information

Limited customer access to and use of reliable information on prices and other aspects of the services can dampen competition by reducing the degree to which customers act upon differences between providers. As a result, providers are better able to act independently of customers. However, it is possible for active behaviour by relatively more aware customer segments to produce competitive effects disproportionate to the number of customers involved.

This criterion is distinct from ‘Barriers to switching’ in that switching does not cover first time purchasers of a product. These customers may be more numerous than switchers at certain stages of a product’s life cycle.