Most Read Contributor in Hong Kong, September 2016
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
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
Next week we will take a look at predatory pricing, which is a
form of abuse of market power.
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This article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein. Please also read the JSM legal publications
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As mentioned in our previous alert in this series, the Hong Kong Competition Commission's investigative process begins with an Initial Assessment to screen suitable cases for further investigation or other action.
The investigative process begins by the Hong Kong Competition Commission (the "Commission") identifying a potential contravention of a competition rule.
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