Market definition and market power

Question 1

Market definition

Answer 1

Analytical tool to assess
- the scope of markets,
- competitive restraints,
- market shares,
- market power

Market definition is almost always relevant to consider, but especially in the following cases:

• What is the relationship between the parties? Are they competitors or are the markets in other ways connected?
• Is there an appreciable effect on trade?
• Does the agreement qualify as de minimis?
• Do the parties benefit from the block exemptions?
• Does a firm hold a dominant position?
• Should a merger be prohibited because it leads to the significant impediment of effective competition?

Relevant to define the product market and geographic market

Question 2

The relevant product market

Answer 2

Looks at the interchangeability of goods and services

Uses the SSNIP-test to evaluate the interchangeability
- Demand substitution
- Supply substitution
- Potential competitors

Demand substitution
- The consumer and what they would choose if the product they wanted was not available
- If the price increases will the consumer switch to another producers products, if yes, then the products are substitutes and part of the same product market

Supply substitution
- Producers might be able to adjust production in response to a price increase
- Provided the producer can adjust and enter the market “in the short term” (1 year) he is considered an alternative and included in the relevant market

Potentiel compeitiors
- Producers that only in the long term (2-4 years) can adjust their production and enter the market are considered potential competitors
- Not considered part of the relevant market

Question 3

SSNIP-test

Answer 3

Small but Significant and Non-transitory Increase in Price
- Increase in price of 5-10%
- Systematic way of identifying products in the relevant market

Question 4

The Cellophane fallacy

Answer 4

If a dominant undertaking is present, it might have maximized the price, resulting in a dramatic loss of customers if the price is raised further
- The consequense will be that the relevant market will be defined too wide

Question 5

Reverse Cellpohane fallacy

Answer 5

A dominant firm has the price pressed really low (competitive pricing) which could lead to the relevant market being defined too narrow

Question 6

Issues with defining the relavant product market

Answer 6

Spare parts and aftermarket
- A consumer will perhaps take into consideration the price of the secondary products, when deciding on the primary product
- fx the cost of nails for a nailgun
- The market will then include both the primary and the secondary

Question 7

The relevant geographic market

Answer 7

Will an increase in price, lead to consumers located in a particular area switch their purchases to a suppliers further away

Question 8

What is market power

Answer 8

The ability to profitably raise prices over a period (or reduce quality etc.)
- able to behave relatively independently of competitors and consumers.

Question 9

Assessment of market power

Answer 9

Actual competitors
Market shares can form a ”proxy” – a useful first indication
- The higher the share, usually the higher market power

Market Concentration (HHI).
- Competition concerns typically greater if market is concentrated (few players)
- HHI below 1,000 indicates low concentration; moderate between 1,000 and 1,800; and high concentration if above.
- Increase in market concentration is measured as delta – low delta indicates that little market concentration results from specific agreement or merger.

Barriers to entry
- Legal, economics and more strategic (reputation for aggressive behaviour or design)

Potentiel competitors
The potential entry of new competitors to the market may limit market power of existing firms.
- Requires that entry is “likely, timely and sufficient”.

Examples of barriers
- Legal barriers (tariffs or quotas)
- Economic barriers/advantages – scale and scope, access to essential input, important tech, or large distribution network
- Costs, including sunk costs, consumer switching costs, etc.
- Conduct of other firms – exclusivity or loyalty programs with foreclosure effects.

Countervailing buyer power
Efficient bargaining strength to counterbalance the market power of suppliers
- Not an effective constraint if only few buyers enjoy it.