- Although evidence suggested it lacked the power to raise price.
- 'It is apparent that the premiums charged by ECCU will have to be reduced to their core purpose so that comparisons of like with like cover can be made.' ILCU Annual Report, 2002, p.13.
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- Economic rationale behind competition law - consumers and society benefit from rivalry between firms
- Competition law not concerned with unilateral behaviour by individual firms unless firm is dominant.
- Under monopoly prices higher and output lower compared with perfect competition
- Supernormal profits accrue to monopolist.
- Transfer from consumers to monopolist
- Monopolies involve deadweight losses
- Leibenstein – 'x inefficiency'
- 'Rent seeking'
- Many markets where large firms face competition from a number of smaller rivals.
- Small firms could compete aggressively with large rival and achieve large increases in profitability
- Smaller firms face the threat of overwhelming reactions by larger firm – may deter them from competing aggressively.
- Smaller firms likely to confine their activities to specialist niches - may not act as a significant constraint on exercise of market power by dominant firm.
- Such a group of smaller firms referred to as a 'competitive fringe'.
'In short, in many situations the presence of a variety of sizes may be rendered reasonably stable by the fact that the largest firms find it advantageous to skim the fattest segment of the market, leaving it for smaller firms to supply less profitable pockets….and, where antitrust laws are a potential threat, the advantages of having smaller competitors is even more evident.'
Modigliani, F., (1958): New Developments on the Oligopoly Front, Journal of Political Economy, 66 (June): 215-32.
- When products are differentiated all firms have some degree of market power in the sense that a firm will not lose all of its sales if it increases prices in contrast with firm in perfectly competitive market.
- It may lose enough sales to make price increase unprofitable.
- Dominance requires something more.
'..the fact that an undertaking is compelled by the pressure of its competitors' price reductions to lower its own prices is in general incompatible with that independent conduct which is the hallmark of a dominant position'. Hoffman LaRoche v. Commission [1979] ECR 461.
'Microsoft certainly had the ability to raise prices significantly above marginal costs. Indeed, Microsoft possessed the ability to raise prices significantly above long-run average costs, as suggested by the large multiple of Microsoft's market value to the cost of its asset base.'
Gilbert, R.J. and Katz, M.L., (2001): An Economist‘s Guide to US v. Microsoft, Journal of Economic Perspectives, 15(2), (Spring) 25-44.
'The evidence in this case is to the effect that Eircell has been and is forced by the pressure of Digifone's price reductions to lower its own prices and that is incompatible with the independent conduct of the type described in a situation of dominance.' Meridian Communications Limited and Cellular Three Limited v. Eircell Limited , Judgement of 5 April 2001, p.61.
- Although evidence suggested it lacked the power to raise price.
- 'It is apparent that the premiums charged by ECCU will have to be reduced to their core purpose so that comparisons of like with like cover can be made.' ILCU Annual Report, 2002, p.13.
- 'In cases where there is no statutory monopoly, market shares are an important issue in assessing market power, but not to the exclusion of other 'factors indicating dominance' which must be taken into account. Market shares are not conclusive. Mere numbers cannot in themselves determine whether an undertaking has power over the market.'
- R. Whish (Competition Law, 5th ed., London, 2003) p.180
- Akzo
[1991] ECR I 3359 stable market share of 50%+ raises rebuttable presumption of dominance.
'Insofar as the market for credit union representation services is concerned, it is obvious that the larger the market share, the more likely it is that the undertaking concerned is dominant in that market.'
'It is undeniable that ILCU's enormous market share has existed not merely 'for some time' but without interruption until the emergence of CUDA in 2001. However, CUDA accounts for a very small percentage of ILCU credit union members in the State - less than 5%, although the size of the credit unions participating in CUDA means that if one defines share by reference to assets, the CUDA share is 15%. Nonetheless ILCU retains an enormous market share even after the emergence of CUDA.'
'An attempt to exercise market power in an industry without entry barriers would cause new competitors to enter the market. This additional supply would drive prices back to the competitive level. Indeed, the threat of new entry can be as potent a pro competitive force as its realisation.'
US Federal Trade Commission, Final Order: In the Matter of the Echlin Manufacturing Company, and Borg-Warner Corporation, Docket No. 9157, Washington, D.C., 28.6.85.
'It is only when for some reason it is not rational or possible for new entrants to participate in the market that a firm can have market power.'
Queensland Wire Industries Pty. Ltd. v. The Broken Hill Proprietary Company Limited, [1989] ATPR 20-925.
- '[T]he extent to which, in the long run, established firms can elevate their selling prices above minimal average costs of production and distribution…without inducing potential entrants to enter the industry.'
Bain, J.S., (1956): Barriers to New Competition, Cambridge, Harvard University Press.
- 'A barrier to entry may be defined as a cost of producing (at some or every rate of output) which must be borne by firms which seek to enter an industry but is not borne by firms already in the industry.'
Stigler, G.J., (1968): The Organization of Industry, Homewood, Il., Richard D. Irwin.
- Marketing costs may be lower because no rivals – evidence that new entrants must spend much larger amounts on advertising.
- First firm gains familiarity among customers who are then reluctant to switch. Schmalensee, R., (1982): Product Differentiation: Advantages of Pioneering Brands, American Economic Review, 72: 349-65.
- Biggadike, E., (1976): Entry, Strategy and Performance, Harvard University, Division of Research, Harvard Graduate School of Business.
- Tea market in Ireland. Lyons and Barrys 80%+ market share – evidence of high profitability – limited impact of Bewleys, Robt Roberts and Liptons.
- German industrial giant AEG 'invented the first high-performance locomotive, the tape recorder and the Pal colour television system, which became the western European television standard'.
- Group broken up in mid 1990s no longer exists.
- Muncheu, W., (1995): Lingering Death of AEG a Lesson in Mismanagement, Financial Times, 20.12.1995.
- Anglo Dutch firm Lever Brothers regularly beat US rival Proctor & Gamble to market with new innovations such as liquid detergents and concentrated soap powders, only to be overtaken by its American rival in both markets.
- Willman, J., (1999): Marketing Soluble Detergents: Is it Better to be the First Mover in a Market?, Financial Times, 20.8.1999.
- 'Sunk Costs'
- Theory has serious limitations.
- Advertising a 'sunk cost'.
- Modern theories distinguish between exogenous and endogenous, or artificial entry barriers.
- Endogenous barriers due to strategic behaviour by incumbent firms designed to impede entry. Such strategies involve incumbent exploiting some asymmetry between it and new entrant, in order to raise potential entrant's costs above its own.
- Analysis of entry barriers limited.
- R. Schmalensee (2004): Sunk Costs and Antitrust Barriers to Entry, AER Papers & Proceedings: 471-5.
- Suggested distinction between economic and antitrust entry barriers. Antitrust barriers are barriers that delay entry and thus reduce welfare relative to immediate but equally costly entry. R. McAfee, H. Mialom and M. Williams (2004): When Are Sunk Costs Barriers to Entry?, AER Papers & Proceedings: 461-5.
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