Second Annual Conference of the GCLC Santiago Martínez Lage

1. Second Annual Conference of the GCLCSantiago Martínez Lage Brussels, 16-17 June 2005 www.martinezlage.com

2. 1. The role of Market Definition in the application of Article 82: • As a matter of Law, the ECJ made clear in Continental Can that market definition was essential for the assessment of dominance within article 82 proceedings. • The Commission’s Guidelines on the Definition of Relevant Market made it clear that the standard economic approach to defining the relevant market is the SSNIP test. • Since the adoption of the Guidelines, the Commission has manifestly nor applied the SSNIP test but rather preferred to rely on a qualitative assessment of substitutability. • The latter observation is absolutely true: Ever since it was adopted in 1997, the Commission has almost never applied the SSNIP test to define relevant markets when applying both article 81 or article 82. Brussels, 16-17 June 2005

3. Noticeable exception: Before fining WANADOO with € 10.30 million, the Commission concluded high-speed internet access to internet for residential consumers was a different relevant market from low-speed access after carrying out a survey amongst residential subscribers of high-speed internet access service asking for its reaction to a general subscription price increase of 10%: • 80% of the subscriber would keep their high-speed subscription; • 7% would cancel all internet subscription; • 13% would switch to low-speed subscription. Brussels, 16-17 June 2005

4. Definitions of relevant market is rarely so clear: Example Spanish Bacardi Case • Parties submitted abundant evidence supporting their proposition that the relevant market was either rum or spirit mixers (whiskey, rum, gin, vodka). • Depending on the R.M., Bacardi’s would have a market share of + 70% or – 10%. • The TDC expressly acknowledged that the evidence was inconclusive. • If finally concluded that even with a M.S. of 70%, Bacardi would not be dominant in the sense of article 6 LDC/82 Treaty. • Other example: Coca-Cola: • Regular Coca; Cola Light; Orange flavoured CSD’s? • CSD’s? • Beer? Water? Brussels, 16-17 June 2005

5. Defining relevant markets is not a zero-one exercise • The final outcome of article 82 cases should not depend on how R.M. is defined. • “Market definition is a tool to identify and define the boundaries of competition between firms. (…) The main purpose of market definition is to identify in a systematic way the competitive constraints that the undertakings involved face”. (Commission’s Guidelines) • In the real economic life, neither the boundaries of competition nor competitive constraints are clear cut. • In many cases (i.e. non essential consumer goods) it will be impossible to define A full proof relevant market; • In those cases we should be aware that market definition will only be a “best guess” relevant market(s) in the light of the circumstances of each case. Brussels, 16-17 June 2005

6. Since defining relevant market is so imperfect, should we abandon the idea of defining markets as a first step in any competition case? • NO: Starting with the definition of the relevant market helps to avoid circular reasoning: • identify a business practice similar to a 'checklist' of behavior which has, in the past, been found to be abusive; • define a relevant market in such a way that the undertaking concerned has a high market share; • conclude that because the undertaking has a high market share it enjoys a dominant position; and • infer from its dominant position that its behavior is an abuse. • Defining relevant market in essential to focus the subsequent competitive analysis on the EFFECTS of the alleged anti-competitive practices. • Defining relevant market is necessary to establish market shares. Brussels, 16-17 June 2005

7. 2. How important should market shares be when defining dominance • As pointed out in the Damien & al.’s paper: • In Hoffman-La Roche the Court while granting significant evidentiary value to high market shares, it also clearly referred to additional indicator to reflect the company’s real position in the market place. • Subsequent case law shifts the consideration of market shares from one among other indicators of dominance —albeit an important one—to over-reliance on market shares: • It is settled case-law that very large market shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position. AKZO (1991); Van den Bergh Foods (2003) Brussels, 16-17 June 2005

8. Such an approach is based on the Structure-conduct-performance paradigm (one way casual link from structure trough conduct to performance). • SCP paradigm is now largely discredited: • Contestable markets (Baumol, Willig): threat of entry can be sufficient to make monopolist behave competitively: → concentration can be consistent with competitive performance. • Endogeneity of market structure: Intense rivalry reduces price margins which in turn disincentives entry: turning SCP on its head. Brussels, 16-17 June 2005

9. Commission’s Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (2002): • On the one hand, it still stresses the importance of market share when defining dominance: • “Market shares are often used as a proxy for market power. Although a high market share alone is not sufficient to establish the possession of significant market power (dominance), it is unlikely that a firm without a significant market share of the relevant market would be in a dominant position. (…) An undertaking with a large market share may be presumed to have SMP, that is to be in a dominant position, if its market share has remained stable over time. • On the other hand, is explicitly admits that: • “the existence of a dominant position cannot be established on the sole basis of a large market share. (…) NRA should undertake a thorough and overall analysis of the economic characteristics of the relevant market before coming to a conclusion as to the existence of SMP. • The Guidelines mention “amongst other” up to 12 criteria that can be used to measure market power of an undertaking. Brussels, 16-17 June 2005

10. In contrast with the Commission and the Courts position, Spanish TDC has clearly accepted the relative importance of market share as evidence of dominance: • In Gillette/Wilkinson (1999) the TDC, despite Gillettes’ very high market share (70%), ruled that it was not in a dominant position given the presence of other international operators with similar financial resources and the bargaining power of demand: Brussels, 16-17 June 2005

11. “In the defined relevant market which is characterised, in general, by the existence of entry barriers such as the high cost of constructing a production plant, the existence of well-known brands and the need for constant innovation and significant investment in research and development, Gillette reaches a market share of more than 50% in all its segments and is also the leader in terms of sales of handles and razors; however its market power is relative as, on the one hand, there are already strong competitors in the said market such as BIC or the appellant Wilkinson, which devotes substantial resources to both advertising its products and to research and development and which has a similar economic potential to that of Gillette due to the fact that it belongs to the multinational Warner-Lambert group (which is also present in the shaving sector with the "Schick" brand and in other markets with such well-known brands as "Parke-Davis", "Adams", "Oraldine" or "Trident"); and on the other hand one cannot forget the bargaining power of the commercial superstores and shopping centres which operate in the field of commercial distribution and which also have their own-name brands. It is therefore debateable that in the market of reference Gillette can conduct a commercial policy independently without taking into account its competitors, suppliers or customers, which is the criterion which defines the existence of a dominant position both in EC case law and domestic case law Brussels, 16-17 June 2005

12. In Bacardí (1999) was considered not to be dominant even if it had 70% of the narrowest relevant market: • “The fact that a company has a high market share does not necessarily mean that it has a dominant position. It is merely one factor which can only procure such a dominant position in conjunction with other factors. In this case a market share as high as the one enjoyed by Bacardi rum in the Spanish market attracts attention and makes it necessary to take particular care when checking if there is a dominant position, but it cannot serve to declare that such a position exists without more. (…) • “In the present case, there is no evidence that the accused company has independence of conduct, either with regard to the consumers or to its competitors. On the contrary, the main competitors, all of whom belong to company groups having similar size, are constantly obliged to keep an eye on each others commercial movements. This situation favours the non-existance of a dominant position”. Brussels, 16-17 June 2005

13. TDC has also repeatedly ruled on the absence of dominance despite high market shares in the pharmaceutical sector. • In at least three decisions (5.12.2001; 3.12.2003 and 13.10.2004) TDC has concluded that, that given the heavy regulation of the market, the great buying power of the National Health System, the strength of other well established competitors with competing, or potentially competing products and the existence of generics that compete with the products, the laboratories, even having very high market shares, could not behave independently of their competitors or the NHS, as a client, and therefore did not hold a dominant position. Brussels, 16-17 June 2005

14. Conclusions: • It will often be difficult to define A relevant market (non necessary consumer goods); • Defining the relevant market remains however essential: • To define the boundaries of competition between firms. • To identify in a systematic way the competitive constraints that the undertakings involved face. • For reasons of practicality, to measure market shares. • Market shares should only be a screening device to dismiss cases in which no substantial market power exists. • The more questionable the market definition is, the less we should rely on market shares to assess the existence of dominance. Brussels, 16-17 June 2005