Market Power

We mentioned last week that businesses with a substantial degree of market power are under a special responsibility not to abuse their power. To find out whether this special responsibility applies to you, the first step is to assess the degree of market power you enjoy in the markets in which you are active.

What is the market?

Identifying the relevant geographical and product market is a good starting point for assessing market power.

Market definition is mainly determined by demandand supply-side substitution. When the price of a product/service increases, or its quality is reduced, customers tend to switch to lower-priced or betterquality rival products/services. The number of substitutes for a given product/service inform how wide or narrow the relevant market is, and their location determines the geographical boundaries of that market.

By way of example, an increase in the price of a product in Hong Kong may lead to customers turning to brands in other countries, such as China or even the United Kingdom or Untied States, which provide international shipping services. In that scenario an argument may be made that the geographical market for the product is not confined to Hong Kong, but may be worldwide insofar as sellers offer a competitive international shipping service.

What is your market share?

Market share is closely correlated to the degree of power a business enjoys in a relevant market. It is, however, not a conclusive indicator of market power, as the conditions of competition may evolve over time:

  • In a dynamic market where innovation and new competitors constantly challenge the competitive landscape and consumers are reasonably informed and responsive to changes in the market, a high market share may not translate to market power.
  • Where the market is slow moving, opaque or differentiated, a low market share would not preclude the existence of market power. An accurate assessment of market power should take into account changes in market share over time, as well as other factors that characterise the market.

Are there effective competitive constraints?

The presence of the following features tends to contain the exercise of market power:

How open and competitive is the market?

Potential competition is an important driving force of competition and the mere anticipation of likely and timely new competition may be a sufficient constraint to market power. It follows that the existence of impediments to market entry and expansion may insulate existing competitors from competition and protect incumbent market power. These barriers will be considered significant if they substantially delay or prevent market entry or expansion.

Practitioners and economists have different views on what should constitute an entry barrier. For the purpose of competition analysis, the operative question is the extent to which a potential entrant will be deterred or delayed by asymmetries in a market that favour incumbent firms.

Direct barriers such as government regulation (e.g., control of licences) may be insurmountable and foreclose new competition outright. Other barriers, such as the prevalence of exclusivity relationships in the market and high, irreversible investment cost, may make market entry more difficult by lowering the likelihood of post-entry/expansion profitability.

Next Week

Next week we will take a look at predatory pricing, which is a form of abuse of market power.

Originally published 24 June 2015

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