Market Shares and Dominance

A key driver of the SCP paradigm, and a determining factor in any assessment of alleged anti-competitive behaviour in markets, is the reliance on market shares data. The purpose of the data is to rank-order the firms by size as measured by market share as measured by volume or by value. As a general guide, a market share level in a well-defined product market in excess of 40% leads to a definition of a dominant market share, and many national competition agencies have a de facto 40% market share ceiling. Collective dominance would manifest itself in a market if (say) two firms had in excess of 80% share of that market.

Two important interpretations:

Case 1: a firm could grow organically to 42% over the life cycle of the firm. National competition agencies, on their own volition, may investigate such companies or do so on foot of a compliant from a competitor.

Case 2: two firms may enter merger negotiations with a combined post-merger market share of 60%. National agencies, computing the HHIs, often request the merged entity to divest part of the production in order to reduce the HHIs: [go to HHIs computation in KAELO].

High HHIs and Collusion

Within SCP antitrust folklore, high concentration levels leads to collusion. If, however, we accept that competition and concentration are not antithetical, the debate on concentration and collective dominance would become uncomfortably and possibly untenable for antitrust practitioners. Why? Stepping outside the box of incumbent-entrant game, the debate could lead to the conclusion that competition contributes to collusion in a market system. However, it may be possible, theoretically at least, to enunciate the possibility of competition with monopoly outcomes. How many monopoly-provided goods and services do you experience with a reasonable (competitive) price?

Oligopoly Problem (it's a numbers game)

When two companies merge the market becomes more concentrated: more market shares in the hands of fewer companies. It is simply the law of cardinal numbers: if the agreed national threshold = 75%, and the post-merger CR3 = 80% then due diligence would work towards divesting production capacity equivalent to 5% in order for the CR3 to fall from 80% to 75%. If such a divestment plan did not make financial sense, then the management may revisit the numbers again with the national merger agency.

Dilemma: What happens to the divested 5%. Check the numbers to see what would happen if a company with 25% post-merger were to acquire that 5%. Trying to find a remedy that satisfies both the national merger agency and the competing firms can lead to very complex and protracted negotiations. Go to www.patrickmcnutt.com and scroll down to 'News & Commentary' to read the article: Why Bass/Interbrew should not be unscrambled.

When two companies merge the market becomes more concentrated and is called an oligopoly and within an oligopoly there is a probability that once the firms realise their interdependence that they will consider a degree of collusion or concerted action. The danger with this type of logical reasoning is the outcome: mergers unilaterally lead to (price) collusion in a market post-merger. However, colluding firms may not necessarily be the merging entities. It is the market that triggers the behaviour, and while mergers do increase concentration (more interdependence) this does not necessarily imply that all mergers lead to collusion. Let's open a storybook:

Game Theory Storybook

In our discussion of oligopoly in KAELO we had demonstrated that some firms as players in a non cooperative sequential game may seek a win-win outcome through cartelisation; the gains from cartelisation include a less elastic demand curve and a slower rate of entry. It is rational within the game dimension and may be commercially sound for modern firms to collude and therefore it could be convincingly argued that no amount of legislation will stifle that desire.

The argument can be traced back to 1920s wherein it had been argued that firms would avoid competition if the expected rents from cartelisation exceeded the gains from long run competition. This requires us to focus on the type of competition in a market and not on market structure per se. We need to look at the relevance of a Prisoners Dilemma in oligopoly markets acting as an inherent instability factor in any cartel or cooperative situation : [go to Game Theory simulation in KAELO]. Many countries have whistleblower charters that act as an incentive for disgruntled members of a cartel to defect and inform.

One key indicator of cartel-type behaviour, apart from the presumption that high HHIs may lead to a cartel, is evidence of lack of competitive pricing, marked by differences in competitors' prices. Historically in US antitrust with parallel pricing cases – two competitors, for example, have similar price movements - the courts focused attention on the type of evidence 'from which a conspiracy can be inferred'. In this instance the type of behaviour refers to conscious parallel behaviour, that is, a deliberate attempt to fix prices in that market.

We know from game theory that leadership (in price movements) must prevail, and often that requires a degree of discipline across the firms as players: is observed parallel behaviour sufficient to establish an agreement? Antitrust scholars disagreed on the net point: whether or not conscious parallelism was necessary but not sufficient to infer a conspiracy. If companies conspire to fix prices then that would require a leadership role and an enforcement mechanism to deter cheats.

Collective Dominance

The European Commission was once persuaded by the view that a litmus test for collective dominance was the existence of tacit collusion in a market. After lengthy legal challenges we now have some clarity (using game theory language): each member of the oligopoly must know how the other members are behaving in order to monitor a common policy; there must be transparency between the members, dominant companies need to be able to deter departures from the common policy and members abandon independent pricing polices.

However in any defence of a price fixing case the mere fact (as hinted by complainants) of adherence to prices may not establish an agreement to adhere to them or a conspiracy or evidence of collective dominance. Therefore it is doubtful if a Court would find that adherence alone could prove beyond all reasonable doubt, an agreement to adhere to prices; there may be 'an accidental sameness in prices' (ASP) in the industry. An ASP standard – developed by McNutt in his book Law, Economics & Antitrust - is asymptotically close to a bargained competitive price and therefore, it follows that not all instances of parallel behaviour could give rise to the same strength of inference that the parallelism results from anything other than the independent commercial judgement of the firms. Parties who engage in tacit collusion are behaving quite differently from firms that enter into explicit cartels.

Defence: Management of firms that engage in tacit collusion may not even know what they are doing; they may not recognise that the pricing practice helps to support an anticompetitive equilibrium. [go to Game Theory illustrations in KAELO].

Defence: Management involved in complex merger negotiations undertake due diligence, are prepared to negotiate a divestment plans to meet HHI criteria and on the balance of probabilities may create the post-merger environment conducive to collusion or concerted action without participating in any such action.

Transaction Costs

Therefore there is a need to return to an understanding of the type of competition that prevails in a market under scrutiny with a focus on firms interacting in an evolving Boolean network of inter-related firm behaviour. As the atomistic behaviour of a perfectly competitive market structure leads to a long-run equilibrium, likewise the Boolean behaviour of the market systems evolves into an ordered arrangement that manifests itself as market sharing strategies and inevitably implicit or parallel collusion on price. In types of market systems, the firm is an integrated network of market systems. Greater emphasis should be placed on the relevant firm than on the relevant market for antitrust analysis: [go to Management Models in KAELO].