Transcript Présentation Basic Principles of Competition_Dr Frederic Jenny

Basic competition concepts:
a trip to FairyLand
Frederic Jenny
Professor of economics
Chair OECD Competition Committee
Kuala Lumpur
CUTS Seminar June 7 and 8 2013
1
Fairy Land
HappyValley
Mayhem Land
HellHole Land
2
HappyValley, Capital of Fairy Land
Harmony
HappyValley
Dismal
Peak
3
Setting
In the capital town of HappyValley (population 1000) in the country of Fairyland , there
are only two general stores belonging respectively to Mr Eh and Mr Bee. Each one has
incorporated ihis general store and their companies are listed on the stock market of
HappyValley.
To establish a grocery on a piece of land, it is necessary to have a permit and the
municipality of HappyValley has annouced that it will not give a ne permit for another
grocery.
4
History
Mr Eh and Mr Bee are the only source of Coca Cola and Pepsi-Cola in Happy Valley .
From January to March 2012 each one of the two retailers sold cans of Coca-cola at a
price of 10. They bought the cans from CokeBottler Inc at a price of 7,50 each and they
have no other selling costs. When both grocers were selling Coca cola cans at 10, each
one had 250 consumers a day ( so there were 500 drinkers of CocaCola in Happy
Valley). Each retailer also sold 5 cans of Pepsi-Cola which they were selling at a price of
7, having bought them for 6,5 and ( so in total there were 600 drinkers of Coca-cola or
Pepsi-Cola in Happy Valley).
(Questions: how much profit did each one make everyday on his sales of Coke and
Pepsi ? Why did those 500 consumers keep on buying Coca-cola cans at such a high
price and what else could they have done ? What are the possible market definitions ? )
5
Competition
On April 1st 2012 Mr Bee decided to lower the price of Coca-cola cans to 9.5 in
order to attract some consumers from Mr Eh.
When Mr Bee lowered his price to 9.5 he sold 410 Coca-cola cans per day (250 to
consumers who used to buy from his store and were now happier because he was
selling Coca-cola cheaper than he used to, 100 who deserted the store of Mr Eh which
they previously patronized because the price of Coca-cola cans was now cheaper in
the store of Mr Bee, 40 inhabitants of Happy Valley who did not previously buy Coca
Cola because at 10 the price was too high but who are eager to buy one can at price 9.5
and 20 consumers who used to buy Pepsi-Cola in Mr Bee’s store and in Mr Eh’s store
but have now decided to buy Coca-Cola in Mr Bee’s store instead).
( Questions: Was it a profitable move for Mr Bee ?Why did some of the consumers
switch from Mr Eh’s store to Mr Beeh’s store ? What was the average price paid for a
can of Coca-cola before April 1st and after April 1st. If we assume that the revenue of
the inhabitants of Happy Valley remained constant what happened to their purchasing
power ? )
6
Economic Underpinnings of Competition Policy
Market economy: the dual role of the price system:
- relative prices and profits as determinants of consumer
behaviours
- prices and profits as determinants of investment and
production
The dilemma: how to make economic
freedom compatible with economic efficiency ?
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Consumer:
Given my income,the price of fish and the price
of bread I will not buy more than two loafs of
bread par week.
If I could buy bread at a lower price,I would buy
more
High price of bread
High profit in bread making
The dual role of the price of the price system
Producer:
Given the price of bread I make a large profit
when I produce bread. I do not make so much
profit on pastries. To make more money I will
reduce the quantity of pastries and increase
the quantity of bread.
8
The Role of Competition in Market
Mechanisms
Competition forces firms to reduce their cost
to remain competitive
Competition forces firms to reduce their
profit margins to the minimum .
Competition forces firms to innovate
9
Benefits from Competition
Protects the standard of living of citizens
Prevents abuses of market power and
guarantees economic freedom
Forces firms to be as efficient as possible
10
Competition and fairness
Mr Eh reacted with anger to Mr Bee’s price slashing.
He vented his anger by writing a letter to all the citizens of HappyValley denouncing
his competitor and suggesting that he was smuggling imitation Coca-cola cans from
Mayhem, a neighbouring country and selling them cheaply, passing them off as the
real thing.
Consumers organizations reacted with alarm and asked for an enquiry.
A few customers stopped buying Coca-cola cans from Mr Bee and decided to buy
from Mr Eh, even though he was selling at a higher price, because they were
concerned about the quality of the products of Mr Bee.
Mr Bee attacked Mr Eh for having written this letter.
Question: What is the relationship between unfair trade practices and anticompetitive
practices ?
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Legal constraints on business practices:
unfair trade practices
-1) Practices forbidden by unfair trade laws: ( because they are “unfair”
they discourage competitors from investing or entering into a transaction) :
Ex:
1) diversion of a competitor’s customers through means other than competition on
the merits (such as hiring away the
competitor’s employees, inducing the
competitor’s employees to leak strategic documents of their employer such as customer
lists, business plans and other records);
2) attempts to induce selective dealers of a competitor into breaches of contracts or
exploitation of a breach of contract or covert acquisition of a branded good by dealers not
part of the distribution system of the manufacturer of the branded goods;
3) dissemination of unjustified derogatory comments about a competitor’s ability
12
Legal constraints on business practices:
restrictive practices
2- Practices forbidden by commercial law ( restrictive practices, for example
because they do not allow transactions to deliver the expected benefits ) :
ex: resale price maintenance
ex: misleading advertising,
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Legal constraints on business practices:
anticompetitive practices
-3) Practices forbidden by competition law ( if anticompetitive that is if
they restrain or eliminate competition on the market):
Anticompetitive collusive practices
ex: price fixing,
ex: market sharing,
ex: collective boycotts
Anticompetitive abuses of dominant positions
Exclusionary practices
ex: tying, bundling,
ex: refusal to deal
ex price discrimination
ex: predatory pricing ,
Exploitative practices
ex: abusively high prices
etc….
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Unfair competition, restrictive practices and
anticompetitive practices
Unfair trade practices are targeted at a competitor and are seeking to gain an
advantage to the detriment of a competitor; they may not have an effect the market
equilibrium (price and quantity)
Restrictive practices are business practices which are prohibited independently of
their effect on competitors or on the market
Anticompetitive practices are aimed at lessening competition on the market (and
are seeking change the market equilibrium); they may have an effect on all competitors
(actual or potential) and consumers.
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Ex: Resale price maintenance
Ex: Refusal to deal
Restrictive practices
Always forbidden
Unfair trade
practices
Forbidden if unfair
ex: diversion of a
competitor’s customers
ex: dissemination of
comments on a competitor
ex copying of brand name
or product
Anticompetitive
Practices
forbidden only
if anticompetitive
effect on the market
ex: price fixing
ex: market sharing
bid rigging
ex : abuse of dominance
bundling
predatory pricing
refusal to deal
ex: some ( but not all)
exclusive or selective
distribution arrangements
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Unfair trade practices are not necessarily
anticompetitive practices
ex: the diversion of a competitor’s
customers by unfair means (means
other than competition on the merits)
may have no effect on the market if
there are many competing firms
Unfair trade
practices
Forbidden if unfair
Anticompetitive
Practices
forbidden only
if anticompetitive
effect on the market
17
But unfair trade practices may also be
anticompetitive practices
ex: the diversion of a competitor’s
customers by unfair means (means
other than competition on the merits)
can be an abuse of the dominant
position of the firm engaging in the
practice if it prevents its only
competitor from competing.
Unfair trade
practices
forbidden if unfair
Anticompetitive
Practices
forbidden only
if anticompetitive
effect on the market
18
Competition
When Mr Eh was charging 10 ( while Mr Bee was charging 9.5) for a Coca cola can, he
lost a lot of customers ( 100 people deserted his store and he was left with only 150
customers for Coca-cola and 50 customers for Pepsi-cola).
So on May 1st, Mr Eh retaliated by slashing his price to 9 to regain his lost
customers and to attract some new the customer. When he slashed his price to 9 (
while Mr Bee was charging 9.5) he regained his lost customers (100), He gained half of
the additional customers which Mr Bee had attracted thanks to his lower price ( 30
people who are even more interested in paying 9 rather than 9.5) and 40 more
customers who would not have bought Coca-cola cans at the price of 9.5 but are willing
to buy them at a price of 9).
On May 15 Mr Bee lowered his own price to 9.
( Questions: what is the « competitive price » and how doe it compare to the original
price? Who gained and who lost and how much was gained and lost?)
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Price elasticities
When Mr Eh and Mr Bee both charge a price of 10 per can of Coca-cola, each one
has 250 customers ( 500 in total).
When they both charge a price of 9 per can of Coca-cola, they have a total of 600
customers.
Let us assume that each customer buys one can a day.
When the price goes down by 10% ( (10-9)/10), the demand goes up by 20% ( 100/500)
Hence the price elasticity of demand for Coca-cola cans is equal to + 20%/ -10%= -2
The demand is elastic ( larger than 1 in absolute value) meaning that a small decrease in
price induces a bigger increase in total demand.
Note also that the price elasticity for the demand of Mr Bee’s Coca-cola cans with
respect to the price he charges ( when his competitor charges 10) is quite large:
When Mr Bee lowers his price by (10-9.5)/10= - 5% then his sales increase from 250 to
410 or (160/250)= +64%. Hence the price elasticity of the demand for Mr Bee’s Coca-cola
cans with respect to the price he charges ( when his competitor charges 10) is equal to (
+64/-5=-12.8 ).
Such a large value of the elasticity indicates that Mr Bee and Mr Eh are potentially
very close competitors.
20
Market
Market definition is a tool to identify and define the boundaries of competition between
firms. It allows to establish the framework within which competition policy is applied by
the Commission.
The main purpose of market definition is to identify in a systematic way the competitive
constraints that the undertakings involved face.
The objective of defining a market in both its product and geographic dimension is to
identify those actual competitors of the undertakings involved that are capable of
constraining their behaviour and of preventing them from behaving independently of an
effective competitive pressure. It is from this perspective, that the market definition
makes it possible, inter alia, to calculate market shares that would convey meaningful
information regarding market power for the purposes of assessing dominance or for the
purposes of applying Article 85.
1) COMMISSION NOTICE on the definition of the relevant market for the purposes of
Community competition law (OJ C 372 on 9/12/1997)
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Market and market shares
Market: where competition takes place ( an answer to the question who is or could be
competing with whom ?)
Market definition includes « considering whether products:
1) can technically serve the same purpose;
2) are perceived by consumers as fulfilling the same need, and
1) whether they will do so in a way that is cost-effective enough for sufficient
customers to consider them realistic economic alternatives ».
Example: is Coca-cola on the same market as Pepsi cola, other carbonated drinks,
other non alcoholic drinks, other drinks, water ?
Defining a market with mathematical precision is rarely possible
Market shares, a proxy for the determination of the absence or possible existence of
market power, to be considered together with barriers to entry, can be calculated only
after the scope of the market has been defined.
22
Market definition
"A relevant product market comprises all those products and/or services which are
regarded as interchangeable or substitutable by the consumer, by reason of the
products' characteristics, their prices and their intended use."
Relevant geographic markets are defined as follows:
"The relevant geographic market comprises the area in which the undertakings
concerned are involved in the supply and demand of products or services, in which
the conditions of competition are sufficiently homogeneous and which can be
distinguished from neighbouring areas because the conditions of competition are
appreciably different in those areas".
1) COMMISSION NOTICE on the definition of the relevant market for the purposes of
Community competition law (OJ C 372 on 9/12/1997)
23
Product market
Demand-side substitutability : the extent to which customers could and would
switch among substitute products in response to a change in relative prices or
quality or availability or other features.
Supply-side substitutability: the extent to which suppliers of alternative products
could and would switch their existing production facilities to make alternative
products in response to a change in relative prices, demand or other market
conditions.
24
Defining a product market: the hypothetical
monopolist test
(SSNIP test).
'SSNIP' stands for 'small, but significant non-transitory increase in price:
If enough customers of supplier A switched to supplier B if A increased its price by 5 to
10% (above the competitive level) to make the increase in price unprofitable for A, then
A and B are on the same market.
If enough customers of suppliers A and B switched to supplier C if A and B increased
their price by 5 to 10% (above the competitive level) to make the increase in price
unprofitable for A and B, then A, B and C are on the same market
25
Sources of information for market definition
Evidence on characteristics and usage of products and consumer preferences
Internal documents on the commercial strategies of firms such as internal communications,
public statements, and studies on consumer preferences, market research, advertising plans,
general marketing plans or business plans from the
Customers and competitors can be interviewed.
Information from customers about their buying patterns, how they have responded
to previous price rises and how they are likely to react to a hypothetical price rise, whether
there are switching costs ?
Examination of patterns in price changes, for reasons not connected to costs. For example,
two products showing the same pattern of price changes, for reasons not connected to costs
or general price inflation, would be consistent with (although not proof of) these two products
being close substitutes.
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Sources of information for market definition
Evidence of product switching by a relatively large proportion of customers to a rival
product in response to a relatively small price rise in the product in question would
indicate that these two goods are close substitutes
Evidence of price divergence over time, without significant levels of substitution, would
be consistent with the two products being in separate markets
Evidence on own or cross price elasticities of demand.
Own price elasticity: by which proportion does the quantity demanded for product A
vary ( decrease or increase) when the price of A varies by 10% ( increase or decrease) ,
holding everything else constant?
Cross price elasticity: by which proportion does the quantity demanded for product A
vary ( decrease or increase) when the price of B varies by 10% ( increase or decrease)
holding everything else constant?
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Competition and Innovation
Mr Bee realizes that price competition is now quite intense in the market for Coca-cola
and wonders what he could do to gain back some of the customers of Mr Eh.
So in July, Mr Bee decides that he cannot lower his price any further ( both because the
price is already low and because it would be easy for Mr Eh to retaliate) but decides that
he will create a space in the grocery store with stools and a table where consumers can
sip their Coca-cola and chat of they feel like it.
A number of young consumers like the idea of having a place to hang out and decide to
buy their Coca-cola from Mr Bee rather than from Mr Eh so that they can be with their
friends when they drink Coca-cola.
Mr Eh sees that even though he has the same price as his competitor, he now has fewer
curtomer because a lot of young people go buy their Coca-cola cans from Mr Bee.
He decides to organize concerts with popular musicians in a small courtyard adjacent to
his grocery store three evenings per week.
After a few weeks however both grocers have to discontinue offering a “ café” space or
entertainement because it is too costly for them given the intensity of the competition
between them;
Questions: what is the relationship between competition and innovation ?
28
Market product competition and innovation
Market product competition can give firms an incentive to innovate
Ex Michael Porter generic competitive strategie
Cost leadership ( process innovation)
Differentiation
( product innovation)
Creating a niche market ( product innovation ?)
Ex Arrow hypothesis
29
Market product competition and innovation
Market product competition can limit the ability of innovators to access the market and
therefore lessen innovation
Ex Intel EC Decision ( targeted discounts)
Market competition can limit the ability of innovators to finance RD or to exploit innovation.
The prospect of post-innovation competition can deter firms from investing in RD
Ex Schumpeterian hypothesis
30
Market product competition and innovation
Limitation of price competition can facilitate the diffusion of innovation
Ex)Game Consoles ( restrictive distribution agreements)
I Phones ( restrictive distribution agreements)
31
Market product competition and innovation
Innovation by a firm can make further innovation difficult or impossible
Ex Role of Intellectual Property Rights in industries with
incremental innovation processes
( are they defined too broadly ? In biotechnlologies)
Ex Role of network effects ( Video games)
Ex : Innovation preemption
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Market product competition and innovation
Innovation by a firm can increase the incentive of competitors to innovate
Ex I Phone ( Apple)
Innovation race for smart phones : Motorola
Nokia
Samsung
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Market product competition and innovation
Innovation by a firm can increase the incentive for market competition
Ex: AMD's growing threat
34
Baker’s four principles
First, competition in innovation itself – that is, competition among firms seeking to develop the
same new product or process – encourages innovation.
Second, competition among rivals producing an existing product encourages those firms to find
ways to lower costs, improve quality, or develop better products.
Third, firms that expects to face more product market competition after innovating have less
incentive to invest in R&D.
Fourth, a firm will have an extra incentive to innovate if in doing so it can discourage potential
rivals from investing in R&D
Jonathan B. Baker, Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation The American Antitrust
Institute, American Antitrust Institute Working Paper No. 07-04
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Cartel
On July 1st Mr Eh and Mr Bee meet each other at a social function and each one
says to the other : I cannot raise my price for Coca-cola cans unless you also raise your
price also because if I am the only one to raise my price I will lose my customers.
But if we decide together to bring back the price to 10, we will make more money than
today.
They agree to follow this strategy and increase the price of Coca-Cola cans to 10.
Further they agree that their employees will make daily visit to the store of the other to
ensure that he effectively charge 10 per can.
Finally, Mr Eh agrees to write a check of 5000 to the order of Mr Bee and Mr Bee agrees
to write a check to Mr Eh for 5000 with the understanding that these chacks will be
cashed by the beneficiary only if the signator has cheated on the agreement. The
checks are given to to a mutually trusted cousin with the understanding that if one of
them cheats the cousin will give to the victim of the cheating the check signed by the
cheater so that the victim can cash it.
( Question who loses and who benefits ? Should such behaviour be condemned? Why
do they choose to have the exchange of checks ?)
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Competition will not Prevail Spontaneously
Powerful lobbies try to get legal protection from
competition ( ex agriculture in Europe, lawyers,
cement manufacturers etc)
Firms try to avoid competing in order to maintain
their economic rent. They fix price and market
shares. They erect barriers to entry to keep
potential competitors away.
Monopolistic firms or multinationals engage in
exclusionary tactics to eliminate their weak
competitors or in exploitative practices
37
Competition law is the Legal Instrument
Necessary to Ensure that Competition
Prevails where it can Play a Useful Role
Prohibition of anticompetitive agreements between firms (horizontal
or vertical)
Prohibition of abuses of monopolies or dominant positions
Merger control
State Aid Control (in some countries)
But there is no « one size fits all » competition law.
The law must be adapted to the level of economic development,
the specificity of the legal system, the socio-political circumstances
of the country, etc...
38
Conditions that May Influence Entry
1) Sunk costs (create an asymmetry between the incumbent and the potential entrant
which has not yet committed its funds and diminish the possibility of hit and run
entry)
2) Structural conditions such as absolute cost advantages ( but will it last in the
future ?), economies of scale (combined with sunk costs), economies of scope
(combined with sunk costs), high capital costs (absolute magnitude of the total
costs necessary to enter a market, and relative cost of borrowing money to fund
the entry), reputational effects, network effects, barriers to exit, first mover
advantages, vertical integration.
3) Strategic behaviour by incumbents such as predatory pricing, limit pricing,
investing in excess capacity, fidelity rebates and bundled rebates, product
differentiation and advertising (with some controversy), tying, exclusive dealing
arrangements,patent hoarding.
4) Legal/regulatory barriers
40 40
Consumer surplus
Definition: the consumer surplus attached to a unit of a good consumed is the maximum
amount that the consumer would be willing to pay over and above what she pays for that
unit rather than going without it.
41
41
Consumer surplus
PA
10
Demand holding
real income constant
Q1
QA42d42
Effect of a price cartel
on the consumer surplus
1) Net loss of consumer surplus (value
½ (1 x100)= 50
Price
2) Excess profit (1x500)
Protecting consumer surplus:
Goal of antitrust laws
P=10
Exploitation
Excess Profit
P=9
Note: additional consumers when
price goes down + 60 when Mr Bee
lowers his price to 9,5 and an
additional +40 when the price of Mr
Eh goes down to 9
Exclusion
Loss of
consumer
surplus
43
43
500
600
Quantity
Cartels Decisions
Fixing price
Are Cartels unstable ?
Allocating Market Shares
Distributing Profits
Controling Investment
How to make them more
unstable ?
Preventing Entry
Enforcing the Agreements
Punishing the traitors
44 44
Merger 1
In October Mr Eh and Mr Bee learn that there is an investigation by the competition
authority about their arrangement. They abandon their cartel and start competing again.
The price of Coca-cola cans goes back down to 9.
Consumers are happy but the grocers are making little money. Mr Bee who belongs to a
wealthy family ( with a number of businesses both in FairyLand and abroad) proposes
to Mr Eh to buy him out ( to takeover his grocery). He makes him an offer that Mr Eh
refuses ( even though Mr Eh has two daughters to marry and needs cash). But Mr Bee
announces plans to undertake a hostile takeover of Mr Eh’s company.
Because the combination of the turnovers of the two groceries is above the threshold Mr
Bee has to notify the proposed merger to the competition authority which Mr Bee does
on November 12 2012.
In his notification Mr Bee argues that consumers can easily travel to Harmony, the next
town five kms away where there is another grocer, and that this threat means that the
merged grocer of HappyValley will not be in a position to raise its price since it would
likely face a loss of consumers which would make the increase in price unprofitable. Mr
Bee also argues that since consumers can substitute water for Coca-Cola, the merged
grocer will not be in a position to raise the price of Coca-cola in the future. Finally, he
argues that because the merged grocer will now be selling more in town, it will be able to
negotiate a better deal with suppliers ( since it will be buying more from them) which
means that consumers will benefit ( through lower prices) from the enhanced efficiency
of the grocery business.
45
Question: as an antitrust authority how do you look at the merger ? What are the main
issues ?
Merger 2
At the end of November 2012 ( before the Competition Commission of FairyLand has
had made its decision on the merger between the groceries of Mr Eh and Mr Bee) , two
things happen:
First, the mayor of HappyValley announces that he will reverse the town’s policy and will
henceforth allow the creation of a new grocery.
Simultaneously a foreign grocer with a reputation for aggressiveness in pricing , the
Allfornothing company has indicated that it wants to enter the grocery market in
FairyLand and that it would like to start operations in HappyValley. It announces plans to
take over Mr Eh’s groceries and offers a higher price than did Mr Bee. Mr Eh announces
that he is ready to sell his grocery to the Allornothing company.
The mayor of HappyValley believes that the arrival of Allfornothing will be good for the
local consumers who have been hard hit by the economic crisis.
However, small farmers and labor unions in the vicinity of Happy Valley as well as other
retailers throughout FairyLand are unhappy about the possible arrival of Allfornothing
because it has a reputation of being ruthless in its negotiations with suppliers and
employees and they demonstrate daily against the arrival of Allfornothing.The minister
for groceries gives interviews expressing his doubts about the wisdom of the transaction
and repeatedly call the Chairperson of the Competition Authority ( although the Authority
is independent)
46
Question: as an antitrust authority what elements do you take into consideration
Crucial issues in merger cases
- What is the relevant market affected (product market and geographical market)?
-Do the firms have market power ?
- Potential or real anticompetitive effect (or object) on the relevant market?
: unilateral effects ( will the merging firm be in a position to increase its
price unilaterally after the merger?)
: coordinated effects ( will the weakening of competition due to the
disappearance of the merged firm give an incentive to all firms to
increase their prices somewhat ?)
-Possible efficiency benefits?
47
Coordinated effects
Mergers that may increase the sustainability of collusion ( tacit or explicit) by:
-Reducing the number of participants
-increasing symetry
-Elimination of « mavericks »
-creating structural links
-Reducing incentives to innovate
-Increasing multi-market contacts
-Vertical mergers which may increase transparency
48
Coordinated effects
Imagine that there are four competitors A, B, C D each selling 24 units per day and
that the price elasticity of demand for each of the competitors is equal to - 5 (when the
price of the other competitors is 10).
This means that if A increases his price by 5% (to 10.5) he will lose 25% of his
customers ( 6 customers) and will sell only 18 units.
Where will the 6 former customers of A go ? Each of B, C, D will have two more
customers and will now sell 26 each.
Because of his big loss in consumers A may not have an incentive to increase his price
alone.
But what happens if A acquires 100% of B?
If A increases its price by 5% it will lose 6 customers but 2 of them will go to B which is
now owned by A. So the group A+B will now lose only 4 customers if A increases its
price by 5%. Thus, the group A+B may have more incentive to raise the price of A
than firm A had before the merger.
This may lead to a softening of the pressure of price competition throughout the
industry.
49
Exclusion and Exploitation
At the end of December 2012 the Competition Authority of FairyLand gives its approval
to the merger between Mr Eh and Allfornothing and the grocery of Mr Eh is renamed the
GreatBargain grocery.
Mr Bee is very concerned about the new competition. However, Mr Bee also owns the
electricity distribution company in HappyView called the SuddenFlash company. This
electricity company has a local monopoly.
You cannot operate a business without electricity as you need electricity for refrigeration,
for the alarm system, for the cash register etc…..
It just happens that the electricity contracts for the Eh and the Bee groceries have run
out and must be renewed. The cost of producing 1000 KWH is equal to 1 with 0,6 of
variable cost and 0,4 of fixed costs. In their previous contract the Eh and Bee groceries
paid 1.1 per 1000 KWH.
The Allfornothing company calls the Sudden Flash company in HappyView. The
SuddenFlash Company announces to Allfor nothing that it has revised its pricing policy
and that the price for 1000 KWH is now equal to 2.
Simultaneously, the Bee grocery signs a contract with Sudden Flash for a price of 0.5 for
1000 KWH.
The GreatBargain grocery complains to the Competition Authority.
50
Question How does the Competition Authority analyze the situation ?
Abuse of dominance
Mr Bee is concerned about the reference to the Competition Authority made by its
competitor Allfornothing.
Also he notes that the GreatBargain grocery not only has very competitive prices but
also offers its customers deals which sound very attractive to them. As a result a lot of
customers now shop for their Coca-cola at GreatBargain grocery and Mr Bee is left with
15 regular customers whereas GreatBargain has 45 regular customers shopping for
Coca-Cola even though Mr Bee sells his Coca-cola cans at the same price as
GreatBargain.
Mr Bee notices that for a price of 9.50 (very slightly above the competitive price of Cocacola cans) GreatBargain offers customers the possibility to buy a can of Coca-cola and
a glass.
The reason GreatBargain is able to offer such a great bargain is that, since it sells a
large number of Coca-colas cans in HappyValley, it can order a large number of glasses
( from abroad) and gets a huge discount on the price of glasses.
Since Mr Bee is only selling a few Coca-cola cans everyday, he would not get the same
discount on the price of glasses and he would be unable to duplicate the offer of
GreatBargain.
Mr Bee complains to the Competition Authority that the practice of GreatBargain is
illegal.
51
How should the Compettion Authority look at this issue ?
Thank you very much
[email protected]
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