Competition, Not Competitors: Reappraising The Question Of Market Power Under Article 82 EC

• Author: Karole Cuddihy
• Pages: 80-98

Cork Online Law R eview 2006 9

Cuddihy, Compet ition, Not Competitors:

Reappraising the Question of Market Power

Under Article 82 E C

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COMPETITION, NOT COMPETITORS: REAPPRAISING THE

QUESTION OF MARKET POWER UNDER ARTICLE 82 EC

Karole Cuddihy

This paper is an in–depth and comprehensive analysis of the current

mechanism employed by the European competition authorities to assess

whether an entity is in a dominant position for the purposes of Article 82.

The author analyses in detail why the current method is conceptually and

analytically flawed owing, inter alia, to the difficulties of drawing bright line

rules with regard to the consequences of market share and the fluid nature of

the indicators of dominance. The author suggests the “preliminary thoughts”

put forward by the EU Competition Commissioner in a recent address may

be the impetus for change needed to spark a review of this integral area of

competition law and outlines a number of specific reforms which would go a

long way towards addressing the current difficulties.

A CURRENT BACKGR OUND

On September 23rd 2005, EU Competition Commissioner Neelie

Kroes, in an address to the Fordham Corporate Law Institute in New York, put

forward some “preliminary thoughts”1 on a policy review of Article 82 EC. The

move by the Commission to instigate a review of Article 82 policy follows

recent changes in approach regarding the rules on cartels and price–fixing

(under Article 81) and the Merger Regulation. It should also be seen in the

light of the less interventionist approach of the US authorities in recent years

(epitomised by the settlement of the case against Microsoft) and the EU’s

(now sadly lamented) ambition to become by 2010 “the world’s leading

knowledge–based economy”.2

B CONTEXT: ECONOMI C INTRODUCTION

Antitrust (or “competition law” as it is often known outside its North

American birthplace3) is a form of discipline aimed at maintaining the

pluralism necessary to produce competition in market economies. It has been

realised since before the time of Adam Smith in the 18th century that

competition is economically desirable: it results in the efficient allocation of

resources, and consequent increases in consumer welfare. In (static) economic

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1 Neelie Kroes, “Pre liminary Thoughts on Policy Revi ew of Article 82” September 23rd , 2005;

New York, USA. A vailable at

http://europa.eu. int/rapid/pressRe leasesAction.do?r eference=SPEECH /05/537&format= HT

ML&aged=0&lang uage=EN&guiLa nguage=en. The C ommission released a discussion paper

on December 19th , 2005, available at

http://europa.eu. int/comm/compet ition/antitrust/ot hers/discpaper20 05.pdf (both chec ked

February 19th, 20 06). A public consultation process will run until March 31st 2006.

2 The so-called Lisb on agenda required progress by M ember States of the EU towards c ertain

economic goals. It is not thought likely that the obje ctive quoted in the text will be ach ieved.

3 Canada enacted th e first modern antitrust statute i n 1889 and the United States enac ted the

better-known Sher man Act in 1890.

Cork Online Law R eview 2006 9

Cuddihy, Compet ition, Not Competitors:

Reappraising the Question of Market Power

Under Article 82 E C

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!

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theory, the model of perfect4 competition represents a state of equilibrium in

which, if a firm raises prices above marginal cost, it will instantly lose market

share to its competitors (who are numerous) or to new firms, which will

immediately enter the market and undercut the incumbent. In this model, the

firm is a price–taker. It is important to note that perfect competition as such

never exists in actual markets.5 Some of its assumptions, such as perfect

information and complete freedom of entry into and exit from the market are

not consistent with real markets. (In even the most sophisticated modern

market economies, information asymmetries are endemic and therefore so are

problems of incentive compatibility.6)

Consequently, it is not a very useful model on which to base policy.7 In

real markets it will sometimes occur that a firm is able to choose output and

price levels so as to maximise profit,8 without losing its market share to

competitors.9 Here the competitive mechanism has failed: The firm in

question (though perhaps not a monopolist in strict terms) has significant

market power, which has negative effects on consumer welfare and economic

efficiency – mainly in the form of allocative inefficiency,10 which results in a

so–called deadweight welfare loss, which increases with the

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4 In this context “pe rfect” equates to “complete”: V.J .G. Power, Competition Law and

Practice, (Butterw orths, Dublin, 2001,1st Ed.) p.132 fn 69.

5 F.A. Hayek, New Studies in Philosophy, Politics, Ec onomics and the History of Idea s

(Routledge & Kega n Paul, London, 1978) at p.182 d ecried the “absurdity … of starting the

analysis with a situ ation in which all facts are … kno wn. This is a state of affairs which

economic theory c uriously calls ‘perfect competition ’. It leaves no room whatever for t he

activity called com petition, which is presumed to ha ve already done its task.”

6 For an engaging d iscussion of these and other issue s affecting how markets work, see J. Kay,

The Truth About M arkets (Allen Lane/Penguin, Lon don, 2004). As Kay remarks, to n ote such

asymmetries is no t to attack the market economy p er se, but to recognise the fact that the

model of perfect co mpetition is of little practical us e.

7 Klein (in Mathews on, Trebilcock and Walker, The L aw and Economics of Competitio n

Policy (Frazer Inst itute, Vancouver, B.C., Canada, 19 90)) at p.421 “The model is merel y an

abstract economic construct, not a criteria for govern mental intervention in the real wo rld

marketplace.” Klei n (at p. 422) compares the model with the assumption in physics of a

frictionless world in order to illustrate the basic phys ical forces at work. Static models p revent

dynamic analysis; they have no past and no future: C . Ahlborn, D.S. Evans, A.J. Padill a,

‘Competition Poli cy in the New Economy: Is Europe an Law Up to the Challenge?’ EC LR 2001,

p156 ff.

8 The profit maxim isation assumption - though readi ly acceptable to the layman - has been

questioned by som e economists who argue that firm s sometimes have other motives. F.M.

Scherer, Industria l Market Structure and Economic Performance, (Haughton Mifflin ,

Boston, Third Ed. 1989) p.52 concludes from empiri cal data that the assumption “at l east

provides a good fi rst approximation in describing b usiness behaviour”. The debate wa s

surveyed by Koch (1980, pp.56-8).

9 See G. Stigler, The Theory of Price (New York: Macm illan,4th edition, 1987).

10 Also relevant is Lieb enstein’s concept of ‘X-inefficienc y’ ie internal slack resulting from the

lack of incentives f or cost reductions when firms enj oy insulated market positions: see Y.

Bourdet, Internat ionalization, market power & con sumer welfare (Routledge Londo n, 1992)

pp.11-12. On the in efficiencies caused by market pow er see W. G. Shepherd, The Econ omics of

Industrial Organi sation (Ridge Press/Random Hou se, 1990, 3rd Ed.) pp. 126-132.