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Market Dominance and Antitrust Policy PDF

342 Pages·2003·2.56 MB·English
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Utton2 00 prelims 4/12/02 16:20 Page i MARKET DOMINANCE AND ANTITRUST POLICY, SECOND EDITION Utton2 00 prelims 4/12/02 16:20 Page ii For Mark and Harry Utton2 00 prelims 4/12/02 16:20 Page iii Market Dominance and Antitrust Policy, Second Edition M.A. Utton Professor of Economics, University of Reading, UK Edward Elgar Cheltenham, UK • Northampton, MA, USA Utton2 00 prelims 4/12/02 16:20 Page iv ©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 Utton2 00 prelims 4/12/02 16:20 Page v Contents List of figures and tables vi Preface to the first edition vii Preface to the second edition ix PART I ANALYTICAL AND INSTITUTIONAL BACKGROUND 1 The economic analysis of market dominance 3 2 Market dominance in practice: current perceptions and trends 27 3 The antitrust response: an outline of antitrust policy in Europe and the United States 44 PART II MARKET DOMINANCE: HORIZONTAL ISSUES 4 The measurement and interpretation of market dominance 59 5 Market conduct of dominant firms: I 85 6 Market conduct of dominant firms: II 126 7 Market dominance and collusion 149 8 Horizontal mergers and market dominance 171 PART III MARKET DOMINANCE: VERTICAL ISSUES 9 Vertical integration and vertical mergers 207 10 Market dominance and vertical restraints 233 PART IV PRIORITIES AND PROSPECTS FOR ANTITRUST 11 Priorities in antitrust policy 273 12 Antitrust policy in an international perspective 291 References 309 Index 323 v Utton2 00 prelims 4/12/02 16:20 Page vi Figures and tables Figures 1.1 Price and output under simple monopoly 4 1.2 Price and output under competition and monopoly with organizational economies 14 1.3 Price discrimination and allocative efficiency 17 1.4 Welfare losses from market dominance 20 4.1 Monopoly price and welfare loss 62 4.2 The dominant firm and the competitive fringe 64 4.3 Excess profits and market power 70 5.1 First degree price discrimination 87 5.2 Third degree price discrimination 91 5.3 Price and cost of the dominant firm 104 5.4 Price strategy of the dominant firm 107 6.1 Contestability and entry 130 7.1 Collusion to raise price 151 7.2 Duopoly with differing costs 153 8.1 The welfare trade-offs in horizontal mergers 174 9.1 Incentives to integrate under different production conditions 211 9.2 Double monopoly mark-ups and vertical integration 213 10.1 Welfare effects of resale price maintenance 237 12.1 Dumping and price 294 Tables 2.1 Average five-firm concentration for a sample of 121 manufactured products in the UK, 1958–77 (unadjusted and adjusted for imports) 37 2.2 Long-run shares of market leaders in six UK industries 39 2.3 Entry barriers and market structure 42 8.1 Calculation of the Herfindahl (H) index in a market with six firms 179 vi Utton2 00 prelims 4/12/02 16:20 Page vii 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 unan- nounced 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 con- fectionery 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 dis- tributors. 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 appro- priate 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 interna- tional ‘reach’ of antitrust and foreign takeovers of domestic firms. vii Utton2 00 prelims 4/12/02 16:20 Page viii 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 competi- tion 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 accompa- niment 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 deci- phering my handwriting and preparing the final draft for the publisher. M.A.U. Utton2 00 prelims 4/12/02 16:20 Page ix 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

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Market dominance - encompassing single firm dominance, overt and tacit collusion, mergers and vertical restraints - raises many complex analytical and policy issues, all of which continue to be the subject of theoretical research and policy reform. This second edition of a popular and comprehensive
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