Draft - Information Bulletin on the Abuse of Dominance Provisions as applied to the Telecommunications Industry: Part 3 - Market Power Assessment

3.1 Role of Market Power Assessment in Abuse of Dominance Cases

Having defined the relevant market, the next step is to assess whether a firm or group of firms is dominant in that market (i.e., that one or more persons substantially or completely control the relevant market). A dominant firm^[34] (i.e., a firm that has market power) will be able to act independently of competitive discipline to a material degree. Therefore, market power may be defined with respect to the ability of a firm to profitably cause one or more components of competition encompassed within the concept of price (i.e., price, output, quality, variety, service, advertising or innovation, etc.) to significantly deviate from competitive levels for a sustainable period of time (i.e., impose a SSNIP).  It is then necessary to identify all competitors and assess the extent to which they actually or potentially constrain any market power that the firm in question might otherwise possess.

Given the difficulty inherent in measuring market power directly (due to a lack of direct evidence other than price, profit levels, and the conduct of the firm in question), the Bureau also relies upon a number of indirect indicators – both qualitative and quantitative – of market power.  These indicators include, but are not necessarily limited to, the following:

• market share;
• barriers to entry^[35]; and
• other market characteristics, such as the extent of technological change and countervailing power. 

Each of these is discussed in more detail below.

3.2  Market Share

An important factor in assessing market power, along with barriers to entry, is market share.  The Bureau's view is that high market share is usually necessary, but not sufficient, to establish market power.^[36] In the contested abuse of dominance cases heard to date, the market shares of the dominant firms were very high, suggesting that in these instances customers had few alternatives to choose from in the event that the dominant firm increased price above competitive levels.^[37]

Market share can be measured in terms of dollar sales; demand units such as minutes, lines or circuits; or capacity.  If products in the relevant market are homogeneous and firms are all operating at capacity, market shares based on dollar sales, demand units or capacity should all yield similar results.  As products are more differentiated, market shares based on dollar sales, demand units and/or capacity increasingly differ.  The Bureau therefore collects information necessary to calculate market share on all of these bases. 

3.3 Barriers to Entry

As noted above, high market share does not determine market power.  Without barriers to entry, any attempt by a firm with high market share to exercise market power is likely to be met with entry or expansion such that the firm would lose enough customers to its rivals that it is not profitable to attempt to raise prices above competitive levels.  Barriers to entry can include: significant economies of scale; sunk costs; regulatory barriers; long-term contracts; market maturity; and the reputation of incumbents.

A competitor must not only be able to enter, but must also be able to remain in the market long enough to recover its sunk investments.^[38] Entry must be timely, likely and sufficient before it can constrain the exercise of market power.  Timely means that entry will occur relatively quickly^[39]; likely refers to the expectation that entry will be profitable; and sufficient means that entry would deter firms from raising prices by a significant amount. If entry is timely, likely and sufficient, then attempts to exercise market power by a firm will be unsuccessful as entry creates substitute products for consumers. In assessing barriers to entry, the Bureau will also consider the possibility of supply-side substitution.  This includes potential service providers that would incur relatively substantial sunk costs to enter the market or expand their operations.

A thorough entry analysis will involve consideration of all possible barriers to entry.  However, in telecommunications markets, certain barriers to entry are more common than others.  These include sunk costs, regulatory barriers, economies of scale and network effects, long-term contracts and market maturity.

In telecommunications, sunk costs would include a large fraction of the costs to build or upgrade a network for the purpose of offering a particular service or services.  Regulatory barriers can include any federal, provincial and municipal regulations that affect a firm's ability to enter a market or expand its operations.  In telecommunications, foreign ownership restrictions, access to rights of way, allocation of spectrum, and other regulatory obligations imposed on providers of particular services may constitute barriers to entry.  Network effects occur in the telecommunications industry where the value of a product or service increases as more customers use that product or service, e.g., as more customers join the network.  Long-term contracts refer to commercial agreements binding a firm and its customers to the agreement for an extended period of time.  The maturity of the market being assessed is relevant because in general, it will be more difficult to enter a mature market and compete with firmly entrenched players (i.e., incumbents may enjoy longstanding and good reputations and close relationships with customers, which can be significant barriers to entry).

3.4  Other Market Characteristics

The Bureau will consider other factors in assessing market power.  Factors other than market share and barriers to entry that are particularly important to the assessment of telecommunications markets are the extent of countervailing power, and technological change and innovation.

In determining whether a firm has the ability to exercise market power, the Bureau assesses whether one or more customers have a countervailing ability to constrain an exercise of market power.  For example, large business customers (such as financial institutions) may be able to constrain the ability of a firm to exercise market power if these customers can switch to other service providers in a reasonable timeframe, vertically integrate their operations, induce the expansion of existing service providers, or encourage the entry of potential service providers.^[40]

The Bureau also takes into account the nature and extent of change and innovation in a relevant market in assessing market power. In addition to technological change and innovation in products and processes, an assessment is made of the general impact on competition of the nature and extent of other forms of change and innovation.^[41]  The stage of market growth is also informative since entry into start-up and growing markets is less difficult and time consuming and the dynamics of competition generally change more rapidly than in mature markets.

3.5 Assessing Market Power in Telecommunications Markets

In many telecommunications markets, the provision of the service is tied to a location and the number of competitive alternatives that are available to consumers can differ depending on where they live or carry on business. In such cases, the Bureau believes that capacity, including network coverage, typically represents an important measure of market power. Unused capacity enhances the incentive and ability of a service provider to compete for customers in response to a price increase by the allegedly dominant firm. Network coverage is an important component of capacity in that it represents the ability of a service provider, due to its physical presence, to offer service to customers of the allegedly dominant firm. When substantial excess capacity remains in a market, allowing firms to easily increase supply in response to an increase in price, the ability to raise price above competitive levels may be considerably lower than what a simple concentration measure might suggest.^[42]

In addition, a firm that owns or controls a network and is not operating in the relevant market but can enter in a timely manner without incurring relatively substantial sunk costs will be considered in the market when assessing market power.^[43]  Such entrants could feasibly add capacity to the relevant market in response to a SSNIP in order to discipline an exercise of market power.^[44] An example of this is a network requiring some technical upgrade to offer a competing service.

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[34] Unless otherwise indicated, reference to a firm means a firm or a group of firms. It is possible that a group of unaffiliated firms may possess market power even if no single member of the group is dominant by itself. The assessment of market power in a joint dominance case is discussed in greater detail in the Enforcement Guidelines on the Abuse of Dominance Provisions, supra note 3 at 16-17.

[35] Unless otherwise indicated, entry into, or entering, a market refers to both entry by new firms and expansion by existing firms.

[36] Generally, the Bureau will continue with an examination of a matter if the market share of the party in question exceeds 35 percent, or in the case of a joint dominance case, a joint market share that exceeds 60 percent. 

[37] For example, in Canada (Director of Investigation and Research) v.Tele-Direct (Publications) Inc., [1997] 73 C.P.R. (3d) 1 (Comp. Trib.) Tele-Direct, the Tribunal stated that it would require evidence of “extenuating circumstances, in general, ease of entry” to overcome a prima facie determination of control based on market shares of 80 percent and higher in local telephone directory advertising markets.  In Laidlaw, the Tribunal observed that a market share of less than 50 percent would not give rise to a prima facie finding of dominance, but this does not imply that market power could never be found below 50 percent.

[38] As the Tribunal noted in Laidlaw, the term “barriers to entry” carries with it the connotation of sustainability, supra note 16.

[39] In the Bureau's analysis, the beneficial effects of entry on prices in this market normally must occur within a two-year period.

[40] Where price discrimination is possible, not all customers may be able to counter an attempt to impose a SSNIP. For example, a firm may be able to increase price to some customers who may not have the options available to other customers, even though those other customers may be able to resist a price increase. In such cases, the group of customers that cannot counter the price increase may constitute a relevant market. If the firm has market power in such a relevant market and abuses such market power, the Bureau would examine whether there is likely a substantial lessening of competition with respect to such a group of consumers.

[41] These include change and innovation in relation to distribution, service, sales, marketing, packaging, buyer tastes, purchase patterns, firm structure, the regulatory environment and the economy as a whole.

[42] For example, in geographic markets where there are two independent facilities-based service providers (a facility-based service provider is one that owns and operates its own networks) with sunk costs that are not capacity constrained and are equally capable of offering the relevant product, the capacity market share of each would be 50%.

[43] Supply responses (e.g., the likely responses of “potential” competitors) are important when assessing the potential for the exercise of market power, but are not examined when defining relevant markets, supra note 24.

[44] This is consistent with the approach in the Merger Enforcement Guidelines, supra, note 24, at 4.1.