Any investigation by competition authorities of an alleged case of abuse of dominance by firms with substantial market power will be informed, at least in some part, by economics. OECD’s Richard May explores the role economics plays in competition enforcement and highlights some of the complexities and options relating to its effective use in the run-up to the 2021 Global Forum on Competition.
When firms holding dominant positions in the market place use their position to exclude rivals or exploit customers, this can be characterised as an abuse of dominance. In most jurisdictions, the holding of a dominant position is not a concern in and of itself. Instead, the focus is on the effect of their conduct which may have stifled competition or led to the extraction of supra-normal profits.
The enforcement of abuse of dominance is a core facet of most competition regimes around the world. Although, perhaps more so than for other common competition tools, significant differences in approaches can be seen across jurisdictions.
Many speculate that levels of market power are increasing globally, with potentially detrimental effects for both consumers and economies. Questions are being raised over the effectiveness of enforcement of abuse of dominance. Some observe a clear pattern of under enforcement across the globe.
Abuse of dominance cases are often long and drawn out, requiring that competition authorities invest resources in cases that may have uncertain outcomes. On top of this, cases can become complex, with complicated economic models and arguments debated intensively.
Are developing economies more exposed?
These issues are likely to affect, at least to some degree, almost all competition regimes across the globe. However, they may make the enforcement of abuse of dominance particularly difficult for authorities in smaller and/or developing countries, where resources may be thinner on the ground and enforcement experience more limited. As Professor Roberts argues, these may be the countries where market concentration – and hence the harm from abuse of dominance – is more likely to occur, highlighting a particular need for effective enforcement.
This has led some to question whether under enforcement could be addressed by changing how abuse of dominance is enforced in some jurisdictions. For example, some argue that the burden of proof should be shifted to require firms holding dominant positions to prove that their actions result in no harm. Such discussions often focus on digital markets but the principles could easily be applied more widely.
Others argue that such a change in the burden of proof will punish successful businesses and have a chilling effect on business certainty, as well as other potential unintended consequences.
Of course, one size may not fit all, with the risks of over and under enforcement needing to be carefully balanced given a jurisdiction’s circumstances, which could lead to the optimal adoption of different approaches.
Debate on the appropriate enforcement standard aside, most would surely agree that effective enforcement of abuse of dominance is important. Further, most would also agree that economics has an important role to play in ensuring that effective enforcement.
The role of economics in abuse of dominance cases
Similar to many forms of competition enforcement and assessment, economics should form a central part of abuse of dominance investigations. As with other enforcement areas, economics forms the foundations for the law, and as such needs to work alongside it, as already discussed at the 2020 Global Forum on Competition.
Economics provides the tools to assess whether substantial market power exists and whether exclusionary conduct is harmful. These tools can be applied to both horizontal (such as rebates, bundling or tying) or vertical (such as a margin squeeze or refusal to supply) assessments. For example, economics helps to assess whether an “as efficient competitor” is foreclosed, rather than simply a particular complainant.
Economics also assists when deciphering between conduct that harms competition and that which only harms competitors, the latter potentially simply being healthy competition in action. Such distinctions require a detailed case-by-case assessment and careful analysis. After all, even if conduct does harm competition, this could be justified on efficiency grounds if there are no alternative ways to achieve the efficiency.
So, how can the input of economics be maximised to ensure effective enforcement, particularly in light of the increasing complexity of cases and the probability that budgets are not increasing at the same rate?
Ideally, economic input would be integrated into teams from the beginning, although how will depend on the circumstances. Economics plays an important role in understanding market dynamics and addressing key questions in cases. Its role should not be limited to complicated quantitative techniques, but with economic principles applied throughout.
This is not to say that quantitative techniques have no role to play in effective abuse of dominance enforcement, although we should perhaps be wary of increasing complexity for the sake of complexity. Authorities will need to consider carefully how best to employ their economic resources in each investigation.
Professor Robert’s note sets out the economic concepts relevant to abuse of dominance enforcement and provides guidance on how to use economics effectively, including a number of practical tips and real world examples.
A dedicated session at the 2021 Global Forum on Competition will discuss this topic and feature contributions from leading authorities.