Dominant market position: when a firm holds it and how it can abuse it

When does a company hold a dominant position in the market? How can it abuse its dominant position? According to economic theory, companies with a very high market share are called dominant in their markets. The existence of a dominant position results from the contribution of many factors which, taken individually, might not be decisive. Initially, the percentage of participation of other competitors in the same market matters. When a company has a market share of more than 50% for periods longer than one year, then the company has a dominant position (DP) in the market (Vettas and Katsoulakos, 2004). Other factors to consider are product differentiation, ceteris paribus, and brand names as well as other natural or legal barriers to market.

When barriers to entry are high, existing businesses will be able to have long-term prices higher than their marginal cost without causing new businesses to enter their market. But if there are no barriers to entry, regardless of whether the company’s share is very high and over 60%, then it is difficult to keep prices above the competitive level. In addition, an important factor is the nature of competition in the market. The strength of the business can be limited if the strength of the competitors is very strong. Once a company’s DP is established, the Competition Policy and its authorities are responsible for preventing the company’s DP from being abused and protecting competition from weakening. 

Thus, in order to assess whether the behavior of a dominant company is abusive or not, the research concerns the form of the behavior and not its results. In fact, it is accepted that the company holding a dominant position has a special responsibility not to jeopardize effective competition. 

How can a company abuse its dominant position in the market? The main types of abusive behavior are:

  • Refusal to deal: The dominant company refuses to supply a product or service to an existing customer or potential competitor. It can also deny the access to information and intellectual property rights.
  • Predatory Policy: It is a strategy which sets a very low price to cause the dominant company’s competitors to leave the market or to exclude new competitors in this market in order to charge very high prices in the future and to make big profits.
  • Exclusive Contacts: They concern exclusive dealing and exclusive territory contracts. Exclusive dealing is a contract that allows the buyer to procure a product only from the supplier with whom he has signed a contract and prohibits from anyone else. In contrast, exclusive territory concerns geographical restrictions and is a contract that obliges a single company to distribute the product of a supplier in a specific area.
  • Rebates: A kind of price competition is the discounts given to a customer when he exceeds a specific ‘target’ within a certain period of time. They can be an effective way to mobilize the distributors of a business.
  • Tying (Tied Sales) / Bundling: The last type of abusive behavior refers to the dependence of the sale of one product on the purchase of other products. That is, the company refuses to sell a product if the customer does not buy the second product, despite the fact that the second product could be purchased separately. We will dive into Tied Sales in another article.

There are many reasons for a company to choose any of the above behaviors. It can do so by arguing for effectiveness, for price-related purposes, or for other strategic reasons. Although sometimes this is the case, very often the above practices are used for anti-competitive purposes. The impact on competition ranges from a small effect on the opponent’s ability to compete to the complete exclusion of existing or potential competitors. 

No matter what, apart from the basic principle that antitrust policy should balance potentially beneficial effects against potential anti-competitive effects, a simple legal model would not be appropriate to apply in anti-competitive cases as an appropriate antitrust policy depends on the characteristics of each case.

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Bibliography

  • Vettas, N. and Katsoulakos, I. (2004), Competition Policy and Regulatory Policy, Typothito.

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