1. PANEL II Criteria Used to Assess The Durability of Market Power

2. Durability of Dominance and Identifying Entry Barriers and Competitive Effects in Practice ICN Unilateral Conduct Workshop, Panel II, Washington DC March 23, 2009 Presented through a not-so-scenic tour of Jersey, Channel Islands

3. -Assume the presence of a dominant firm making monopoly profits Classic Economic Theory: Entry restores effective competition Key Question: Will it happen in practice?

4. The Costs of Entry (I) Establishment Access to Labor/Expertise Access to Capital Capital Investments Sunk Costs? Facilities

5. The Costs of Entry (II) Potential bottlenecks Supply Chain Access to Markets

6. Legal Considerations National Laws Potentially, Sector Regulation PATENTS (JERSEY) LAW 1957 PLANNING AND BUILDING (JERSEY) LAW 2002 CUSTOMS AND EXCISE (JERSEY) LAW 1999

7. Incumbents Network Effects? Legacy of State ownership? Vertical Integration? Reputation of incumbents?

8. Customers/Consumers Barriers to Switching? Search Costs? Preferences?

9. ? Ultimately: Will New Competition Restore a Competitive Market? For the Potential New Entrant: Is there a profitable business case? For the Competition Law Enforcement Agency: Entry timely, likely, sufficient? Other market factors relevant? Is dominance entrenched?

10. Panel II Speakers Dr. Simon Roberts –Chief Economist and Manager, Policy and Research Division, Competition Commission South Africa Jacques Steenbergen –Director General, Belgian Competition Authority Ronald A. Stern –Vice President & Senior Competition Counsel, General Electric Company Charles Webb –Executive Director, Jersey Competition Regulatory Authority

11. Belgian Competition Authority Directorate General Durability of dominance Jacques Steenbergen director general ICN Unilateral conduct workshop – Panel II Washington DC, March 23, 2009

12. Durability of dominance: an ambiguous issue Durability is a specific concern in case it increases the risk of abuse: –Exclusionary practices –Exploitative abuses –Discrimination Durability is also a specific concern when it is the result and/or evidence of abusive practices that aimed at the strengthening of a dominant position Durability of dominance makes abuses more serious and exclusionary abuses are in turn likely to enhance durability: it is an element of assessment/evidence Belgian Competition Authority Directorate General

13. Durability of dominance: an ambiguous issue (2) But durability is as such not a constitutive element of an infringement of the rules of competition, just as dominance does as such not constitute an infringement Because of an ambiguous attitude to dominance, we inevitably also have an ambiguous attitude to its durability And we can not exclude that durability mainly points to consistent competitive success It must be assessed in the context of the assessment of dominance and abuse Belgian Competition Authority Directorate General

14. Assessment of durability Assessment of dominance: see best practices Assessment of durability: mainly assessment of barriers to entry (see presentation of Chuck Webb) Assessment of the causes of durability: only relevant to the extent that: –Durability is a specific concern –The causes need to be addressed as such regardless of the specificities of the unilateral conduct case: evaluation of the regulatory environment and state action Belgian Competition Authority Directorate General

15. Durability of dominance and liberalization: the case of incumbents The (former) monopolists can only lose market share: are they (still) dominant? Sunk costs and written-of investments The technology timeline Price squeezes: caught between consumer welfare and competitor protection? The unilateral conduct equivalent of sticky pricing? (See further the presentation of Simon Roberts) Belgian Competition Authority Directorate General

16. ICN Unilateral Conduct Workshop Assessing Whether A Firm is Dominant – The Role of Other Market Criteria Ronald A. Stern Vice President & Senior Competition Counsel General Electric Company March 23, 2009

17. ICN Workshop Other Market Criteria GEHoneywel l Rolls Royce Pratt & Whitney 1.Overall Installed Base40-50% 0-10%0% 2.Installed Base of Aircraft in Production 60-70%30-40%0% 3.Order Backlog on Aircraft Not Yet in Service 90-100%0-10%0% Engines for Large Regional Jets ( 70-90+ Passengers ) Prior to the transaction, GE was already dominant in this market.

18. ICN Workshop Other Market Criteria How Does the Relevant Market Operate? Powerful Buyer – Aircraft manufacturer Winner-take-all Bidding – 1 engine selected Pricing Locked-In by contract for the life of the aircraft program Key Issue – Were there credible bidders when the engine supplier was selected?

19. ICN Workshop Other Market Criteria

20. Existence of Credible Bidders Multiple engine firms competed for large regional jet opportunities – GE or CFM; RR; SPW or PW RR and PW each had a track record of success in commercial aircraft engines generally and in adjacent markets (small regional jets; 100-120 seat large commercial aircraft) SPW JV won one of the large regional jet engine competitions Dominance/substantial market power unlikely despite extremely large market share

21. ICN Workshop Other Market Criteria What Has Happened Since 2001? PW continued to invest in innovative geared fan technology Snecma continued to pursue regional jet engine opportunities separate from PW Three new large regional jet programs launched: 1.China Regional Jet (ARJ121) – GE engine 2.Russian Regional Jet (SSJ100) – Snecma/Saturn JV engine 3.Mitsubishi Regional Jet (MRJ) – PW geared fan engine

22. ICN Workshop Other Market Criteria Growing Market Share Approaching 100% May Not Equal Dominance/Substantial Market Power Examine how the relevant market works Assess other factors such as (1) powerful buyers, (2) bidding/winner-take-all contracts, (3) rivals success in adjacent markets, and (4) ongoing innovation by rivals Focus on whether there is evidence of a high decree of sustained pricing power – the RPs definition of Dominance/Substantial Market Power

23. 23 Dominance, durability and state- created monopolies ICN Unilateral Conduct Workshop Simon Roberts

24. Introduction Durability of dominance is important in dominance assessment, and we are concerned with whether a firms dominant position is entrenched, and why Dangers of over-enforcement and chilling effects? - matters greatly how dominance was established A firms dominant position may be entrenched because of previous/ongoing state support, even though firms inefficiency and/or exercise of market power may mean there are some fringe competitors Dominant firm may have the power, incentive to engage in anti- competitive conduct to undermine effective competitive rivalry In many countries this is a big issue for competition authorities, compounded by relatively small markets, scale and scope effects, access to upstream markets/vertical integration etc. 24

25. 25 What should we be considering in state-created monopoly? Ownership But state support is much wider: –Subsidies, finance –Rights to infrastructure, inputs etc –Past regulatory provisions, licencing (such as marketing boards and legal cartels, where there may have been regional allocations) Not-regulated today (i.e. not talking here of regulated natural monopolies) and Where the advantage bestowed is not transitory Relates to other considerations such as entry barriers, economies of scale/scope etc

26. 26 Illustrative Examples 1. Grain Silos Owned by former cooperatives which had received high levels of state support and subsidies, now private companies, providing wide-range of services and also engaged in trading of grain Large investments required to build silos (although alternatives being used: silo bags) High local transport costs for grain Silo firms had set conditions linking farmers storage of grain to their own trading operations 2. Airlines (domestic flights) National carrier still state-owned with government capital injections, after failed privatisation, facing rivalry in local market in full service and low cost airlines Inducements to travel agents relating to sales/quotes of its flights over rivals Dominance? - Low cost and full service; time sensitive travel (corporate market)?

27. 27 Examples cont. 3. Industrial chemicals – fertilizer manufacture Countrys major chemicals company; state-owned until 1990 Continued to receive state support (incentives, infrastructure) advantageous access to inputs (natural gas pipeline supply) Pricing main fertilizer chemicals against an imported alternative fertilizer; alleged exclusionary actions against downstream blenders/distributors/importers 4. Beer Incumbent brewer with c95% of market Not state-owned but historically very close links with state Entry barriers may appear low (scale economies etc), but issues of branding, distribution etc Various alleged exclusionary/restrictive conditions on distribution and retail outlets

28. Implications? Avoid over enforcement / false positives – wrongly finding abusive conduct –this depends on the hurdle of dominance and on the criteria for finding abuse Under enforcement is much more likely in countries with small markets, given scale economies etc; –higher levels of state support in the past and present further reinforces this –State support is one factor in comprehensive consideration of factors affecting competitive conditions in the market under investigation Defining dominance is first step in effective enforcement against anti-competitive conduct by firms with entrenched dominance, especially state-created monopolies 28

29. PANEL II Criteria Used to Assess The Durability of Market Power

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