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MARKET DOMINANCE AND ANTITRUST POLICY, SECOND EDITION For Mark and Harry Market Dominance and Antitrust Policy, Second Edition M.A. Utton Professor of Economics, University of Reading, UK Edward Elgar Cheltenham, UK • Northampton, MA, USA © M.A. Utton 2003 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher. Published by Edward Elgar Publishing Limited Glensanda House Montpellier Parade Cheltenham Glos GL50 1UA UK Edward Elgar Publishing, Inc. 136 West Street Suite 202 Northampton Massachusetts 01060 USA A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Utton, M. A. (Michael A.), 1939– Market dominance and antitrust policy / Michael A. Utton.–2nd ed. p. cm. includes index. 1. Industrial concentration. 2. Market share. 3. Antitrust law. I. Title. HD2757 .U88 2003 338.8–dc21 2002029832 ISBN 1 84064 728 0 (cased) Printed and bound in Great Britain by Biddles Ltd, www.biddles.co.uk Contents List of figures and tables Preface to the first edition Preface to the second edition PART I vi vii ix ANALYTICAL AND INSTITUTIONAL BACKGROUND 1 The economic analysis of market dominance 2 Market dominance in practice: current perceptions and trends 3 The antitrust response: an outline of antitrust policy in Europe and the United States PART II 4 5 6 7 8 3 27 44 MARKET DOMINANCE: HORIZONTAL ISSUES The measurement and interpretation of market dominance Market conduct of dominant firms: I Market conduct of dominant firms: II Market dominance and collusion Horizontal mergers and market dominance 59 85 126 149 171 PART III MARKET DOMINANCE: VERTICAL ISSUES 9 Vertical integration and vertical mergers 10 Market dominance and vertical restraints PART IV 207 233 PRIORITIES AND PROSPECTS FOR ANTITRUST 11 Priorities in antitrust policy 12 Antitrust policy in an international perspective 273 291 References Index 309 323 v Figures and tables Figures 1.1 Price and output under simple monopoly 1.2 Price and output under competition and monopoly with organizational economies 1.3 Price discrimination and allocative efficiency 1.4 Welfare losses from market dominance 4.1 Monopoly price and welfare loss 4.2 The dominant firm and the competitive fringe 4.3 Excess profits and market power 5.1 First degree price discrimination 5.2 Third degree price discrimination 5.3 Price and cost of the dominant firm 5.4 Price strategy of the dominant firm 6.1 Contestability and entry 7.1 Collusion to raise price 7.2 Duopoly with differing costs 8.1 The welfare trade-offs in horizontal mergers 9.1 Incentives to integrate under different production conditions 9.2 Double monopoly mark-ups and vertical integration 10.1 Welfare effects of resale price maintenance 12.1 Dumping and price Tables 2.1 Average five-firm concentration for a sample of 121 manufactured products in the UK, 1958–77 (unadjusted and adjusted for imports) 2.2 Long-run shares of market leaders in six UK industries 2.3 Entry barriers and market structure 8.1 Calculation of the Herfindahl (H) index in a market with six firms vi 4 14 17 20 62 64 70 87 91 104 107 130 151 153 174 211 213 237 294 37 39 42 179 Preface to the first edition Even to the casual observer it might appear that problems of market dominance and antitrust policy are almost daily in the news. Amongst the more prominent examples are the following: officials of the European Commission pay unannounced visits to the headquarters of some of the most famous companies in the world and seize documents that appear to show that they have been colluding on prices; a takeover bid for a highly respected and long-established UK confectionery firm is made by a foreign company and is allowed to proceed unhampered despite widespread protest; in the aviation industry a company whose name is a household word is accused of using predatory tactics to ruin a much smaller competitor; in the UK the most prestigious and successful brewing companies are horrified to learn that the Monopolies and Mergers Commission have recommended that they should be forced to divest themselves of a large proportion of their retail outlets or pubs; in the US the most successful computer software company is accused of anticompetitive behaviour. Many other examples could be cited and in subsequent chapters we will look in detail at cases from the EU, the US and the UK involving collusion, mergers, the market conduct of dominant firms and the market power that may or may not derive both from vertical integration and from vertical restraints. The issues and institutions involved, like industry itself, are complex. The book is therefore structured in a way which we hope will allow the reader to make sense of the complexity. There are four sections. Part I contains an analysis of market dominance and its possible extent, with a preliminary review of the institutions used to deal with it. The core of the book is then contained in Parts II and III, distinguishing horizontal from vertical issues. In Part II, particular attention is paid to the market conduct of dominant firms, which has received so much recent theoretical attention. It also contains a discussion of collusion, where the antitrust response has perhaps been the most uniform, and horizontal mergers, where despite very intensive study many issues still remain unresolved. In Part III, the emphasis switches to vertical issues: that is, those involving the relationships between firms and their input suppliers or their distributors. Both theory and policy in this area have undergone significant changes in recent years. Finally, in Part IV we raise a number of controversial questions about the effectiveness of antitrust policy, including a discussion of the appropriate sanctions both against those who infringe the law and against those who attempt to mould its application to their own purposes. We also take up sensitive questions involving conflicts between antitrust and trade policies, the international ‘reach’ of antitrust and foreign takeovers of domestic firms. vii viii Market dominance and antitrust policy In courses in industrial and business economics in British universities, antitrust policy tends to be relegated to a brief final chapter or passing reference to a few well-known cases. Even though much of the preceding analysis may have led up to some apparently important policy conclusions, the next step – how these are or are not translated into actual policy – is often left unanswered or merely given a fleeting reference. On the other hand, students of competition law or competition policy may acquire a detailed knowledge of many cases without appreciating the economic analysis that may or, in some notorious instances, may not underpin them. By bringing together in each chapter of Parts II and III a discussion of the economic analysis and then the treatment of the issues in European, British and US antitrust policy, we have attempted to overcome this limitation. The intention, therefore, is that the book should provide a useful accompaniment to courses in industrial and business economics, competition law and institutions, and in some instances microeconomics where there is an emphasis on market power issues. The level of economics assumed is no more than that usually taught to first and second year undergraduates and what little algebra is used has been largely relegated to the appendices. Many of the topics have been discussed over several years with business economics students at Reading, and I have benefited greatly from their scepticism and readiness to challenge the conventional wisdom. I would especially like to thank Lauraine Newcombe who coped superbly with the daunting task of deciphering my handwriting and preparing the final draft for the publisher. M.A.U. Preface to the second edition I have used the opportunity of a second edition to make a number of substantial changes. Some of these were necessary because the antitrust laws themselves have changed, and some were required to discuss important recent cases. In the first category was the British Competition Act passed in 1998 and which came into effect in March 2000. The changes embodied in the Act were probably the most substantial made in the fifty years of British competition policy. In the process of aligning British policy closely with that of the European Union, much of the previous machinery was swept away and existing institutions were fundamentally altered. The detailed discussion of the previous policy, especially that involving the Restrictive Practices Act, has therefore been discarded to make way for coverage of the new policy. Similarly, fundamental changes have been made to certain aspects of European policy, especially that dealing with vertical restraints. The second edition, therefore, focuses on the changes that came into effect in 2001. In the second category are a number of cases which not only are highly significant for antitrust policy but have been widely reported and extensively discussed. Probably the most prominent was the case brought by the US Department of Justice against Microsoft, allegedly for trying to monopolize the market for operating systems. The proposed acquisition of McDonnell Douglas by Boeing was widely reported for different reasons. The merger of two quintessentially US companies was challenged by the European Union competition authority. Until a compromise was agreed, the case threatened to rupture US–EU commercial relations. Discussion of these and other cases are included in the new edition. I have also renumbered references to Articles 85 and 86 as Articles 81 and 82 throughout, in accordance with the current Treaty of Amsterdam. Antitrust policy continues to evolve and inevitably, at the time of writing (February 2002), the precise details of further changes in Britain (promised in the Enterprise Bill) and in the EU (concerning the future structure of car distribution) are not finalized. By the time the book is published they will be. The outcome of these and subsequent changes will have to await a further edition! M.A.U. ix