Market Dominance and Antitrust Policy

342 Pages·2003·2.56 MB·English

by  M. A. Utton

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