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Substantial Market Power

This week’s article focuses on substantial market power. It higlights the importance of conducts that are restricted under the Fiji Commerce Commision Decree(2010) and the methodologies for the measurement of
02 May 2016 11:54
Substantial Market Power
Market power

This week’s article focuses on substantial market power. It higlights the importance of conducts that are restricted under the Fiji Commerce Commision Decree(2010) and the methodologies for the measurement of market power.

 

What Is Substantial Market Power?

Market power refers to the ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under competition.

The exercise of market power leads to reduced output and loss of economic welfare.

A business has substantial market power if it is not significantly restricted by its competitors or customers.

For example, a business may be able to raise prices or lower the quality of its products without having to worry about losing customers.

A business has substantial market power when it can profitably hold prices above competitive levels for a sustained period of time.

Section 66 of the Commerce Commission Decree 2010 makes it illegal for any business with a substantial degree of market power to take advantage of that power to deter or prevent rival businesses from competing effectively.

The concept of dominance is generally equivalent to the possession of substantial market power.

When assessing whether a business has substantial market power, consideration is given to the following factors:

 

• Market share and existing competition 

Does the business have a high market share?

The level of existing competition and do competitors help keep prices down.

High market share alone does not necessarily mean a business has market power.

 

• Potential competition 

How much potential competition is there? If the business were to increase prices or reduce quality, how long would it take for a new competitor to enter or an existing competitor to expand?

Would any new entry or expansion help keep prices down?

Could customers import a similar product at a similar price directly from overseas?

 

• Countervailing buyer power

How much power are customers able to put forth on the business?

Would customers be in a position to refuse to buy the goods or services from a supplier that increased prices or lowered quality? Could customers:

• Credibly threaten to switch to another supplier?

• Sponsor another company to enter, for example, by promising a long-term contract to the company if it entered?

• Enter the market themselves?

Methodologies for the Measurement of Market Power

• Price level observations

A regulator should look for a sustained increase in price level.

An increase in price level alone is not a sign of market power, however; it could be related to an increase towards cost-recovery tariffs.

• Market share observations

Market shares are often used as a measure for market power.

Regulators or competition authorities then set different thresholds to determine when a market share should raise concerns about market power issues.

Some of the methods used for measuring market shares is by volume sales, value sales, production capacities or inputs (such as labour and capital) etc.

• Collusive activities

Whether firms or businesses collude to limit competition, by fixing prices and dividing markets.

• Analysis of the firm’s strengths

This includes taking into account additional factors to measure the extent to which a firm acts independently of its competitors and customers.

These factors include the overall size of the firm, control of the infrastructure that is not easily duplicated, technological advantages, absence of buying power, privileged access to capital markets/financial resources,.

Also product diversification, economies of scale, economies of scope, vertical integration, a highly developed distribution network, absence of potential competition and barriers to expansion.

• Analysis of barriers to entry

Barriers to entry are costs that new entrants incur but that an incumbent firm avoids.

This cost asymmetry may reveal dominance, as it may prevent new entrants from competing with the incumbent.

Barriers to entry may arise due to high fixed or sunk costs (costs that a new entrant must absorb, while the incumbent operator does not incur the same risks and costs), or restricted access to essential facilities.

• Quantitative measures of market dominance

Several quantitative measures exist that can help assess whether a firm may have market power, such as the Herfindahl-Hirschman Index (HHI).

It is an index of the number of firms in the market and their market shares, and the Lerner Index that measures the degree to which prices exceed marginal cost.

A market with an HHI of below 1000 is regarded as ‘unconcentrated’, a market with an HHI of between 1000 and 1800 is regarded as ‘moderately concentrated’ whilst a market with an HHI of above 1800 is regarded as ‘highly concentrated’.

Possible Behaviour of Firms due to Substantial Market Power

 

Predatory pricing:

Predatory pricing is where a business lowers its prices for a sustained period of time to drive a competitor or competitors out of the market.

For such behaviour to be illegal, a business must be pricing below an appropriate measure of cost.

The business must also have the ability to recover its losses by increasing its prices later, without having to worry about others entering the market.

 

Refusal to supply:

A refusal to supply can occur when a business operates at more than one level of the supply chain.

Typically a business refuses to supply a competitor with an input, such as a raw material, or to give access to infrastructure.

The competitor needs the input to compete in downstream markets where the business refusing to supply also operates.

 

High access pricing

High access pricing can also occur when a business operates at more than one level of the supply chain.

Typically a business charges a competitor high prices for an input or access to the infrastructure needed to compete in downstream markets where the supplying business also operates.

This is sometimes referred to as a price or margin squeeze.

This is where a downstream competitor can’t survive as the prices they are paying for the input is too high compared to the price customers are being charged.

 

Exclusive dealing: 

A business may have contracts with retailers or distributors that allow them to only sell its products.

A business may also have contracts with a supplier under which the supplier agrees to supply only to that business.These types of arrangements can benefit competition.

However, it would be illegal if a business was using its substantial market power through an exclusive dealing arrangement for an anti-competitive purpose, such as denying competitors access to an input or an important distribution channel.

 

 Tying: 

Tying involves a business only selling a product if the customer purchases it together with another product. For example, product A is only available if the buyer also agrees to buy product B. If a competing supplier of product B can’t supply product A, it may not be able to compete effectively with the business that is tying the two products together.

 

Conditional discounts:

Conditional discounts involve a business offering customers a discount if they meet a certain condition. For example, customers may be required to purchase a certain proportion of their stock or certain volumes from the business to qualify for the discount.

Conditional discounts can be a form of competitive pricing. They may result in economies of scale for sellers and lower buyers’ costs for providing goods or services to customers. For example, volume discounts are a common business practice that can benefit consumers. However, when a business with substantial market power offers conditional discounts for an anti-competitive purpose, a competitor can be prevented from competing effectively. For example, a competitor may not be able to get access to a sufficient share of customers to achieve the scale it needs to compete effectively.

 

Next Week: Price Discrimination

For more information/details on Fiji Commerce Commission and Commerce Commission Decree 2010, visit our website on www.commcomm.gov.fj or join us on Face book as Fiji Commerce Commission.

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