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Blog of Martijn Snoep: More tools to combat market power, please

Opinions may differ on how ACM enforces the competition rules. However, friend and foe alike agree that enforcement should be focused on countering market power. Market power exists where companies (individually or collectively) have such a market position that they can behave independently from customers, suppliers, and competitors. Market power leads to higher prices for consumers, lower prices for suppliers (including employee wages), lower quality, and less innovation. Furthermore, market power reduces market dynamics and opportunities. In short, market power leads to welfare reduction.

Not only does market power negatively impact welfare, it is also undesirable in a democratic society governed by the rule of law. Just as governmental power should be dispersed (think of the separation between the legislative, executive, and judicial powers), so should economic power be diffused. As Senator John Sherman, founding father of US antitrust enforcement, succinctly stated: “If we will not endure a king as a political power, we should not endure a king over the production, transportation and sale of any of the necessaries of life.”

There are roughly-speaking, three ways to counter market power: prevention, weakening, and control. ACM already has various instruments to do so, but an important tool is still missing.

Prevention is better than cure

The best way to counter market power, is to prevent it. ACM does this by reviewing in advance whether a contemplated merger will lead to market power. In that case, the merger is blocked. For this reason, many companies steer clear of such mergers. They know that ACM will block them. Nevertheless, some companies do risk it, only to have their merger struck down. Like the recent blocking by ACM of the merger between media companies RTL and Talpa, because its investigation revealed that the merger would lead to market power and resulting price increases for advertisers and consumers.

Market power can arise from mergers, but also from agreements or understandings between competitors to raise prices or share customers, also known as cartels. ACM takes strict enforcement action against larger cartels (cigarette manufacturers) and smaller cartels (big-rigging by traffic sign companies) imposing high fines, also in order to deter other companies. The threat of fines puts most companies off getting involved in cartels. Unfortunately, there are always companies that think they can get away with it. That is why ACM remains vigilant and continuously invests in new investigation techniques.

Weakening market power can also help

ACM cannot always prevent market power. Sometimes a company develops a nearly unrivaled top-product or service (think of some Big Tech services). Sometimes there is only room for one or a few competitors due to economies of scale, like in the case of physical infrastructure such as cables, pipe lines, and radio masts. In such cases, ACM’s competition enforcement focuses on weakening market power by combatting abuse. An example of abuse of a dominant position could be refusing competitors access to fiber-optic cables, or only granting access under certain conditions, which safeguard the cable owner from competition. ACM can impose fines for such practices, but can also enforce measures that stimulate competition and weaken market power. An example of this is KPN’s commitment to grant its competitors access to its fiber-optic network under predetermined conditions.

Let’s now turn to the missing tool. Market power can also exist without companies forming a cartel or abusing their dominant position. For example, if there are only a few companies active on a market, circumstances can be such that those companies, without entering into any agreement or understanding, do not fully compete with each other. That is what we call an oligopoly. In an oligopoly, companies simply follow each other’s prices and invest the minimum in service and innovation. As a result, they lead a proverbial quieter life and can increase their profits at the same time. However, the consumer is left behind. Usually, ACM is powerless against oligopolies. There’s no cartel, there’s no abuse. The only thing ACM can do, is indicate that there is market power, and that’s it. However, this need not be the case.

In some countries, such as the United Kingdom and Germany, the national competition authority has a tool, in such situations, to impose measures in order to weaken market power. These can be measures to facilitate market entry by other companies and bring market dynamics to the quiet lives of the incumbents. Or measures to improve transparency and empower consumers to inform themselves and switch to other suppliers. Using this tool, authorities have been able to intervene to weaken market power, for example, in the banking industry and in the retail supply of petrol. ACM has already spoken out on the need for this tool (see also the blog of ACM’s Chief Economist), a call which is opportune to repeat now, in the lead-up to the Dutch general elections. ACM hopes for a legal amendment, whereby ACM would acquire a tool similar to that of the UK and German competition authorities in order to combat market power.

Controlling market power as a last resort

If preventing and weakening market power do not help, only controlling market power remains. However, this is easier said than done. ACM cannot force companies with market power to improve quality or increase innovation. Companies have to undertake themselves to do so. Otherwise ACM would need to intervene in detail in the business operation of individual companies. ACM is simply incapable of this, even if it had hundreds more employees. Everyone has their role to play in the economy.

Controlling other negative effects of market power, such as prices and other contractual conditions does offer possibilities. ‘Unfair’ prices and conditions, as they are termed, can be classified as an illegal abuse of a dominant position. Court rulings show that the standard for unfair prices and conditions is high because the legislature (and thus also the court) does not want ACM to intervene too quickly, even in cases of market power. There would have to be an extraordinary situation at hand, such as one of ‘excessive’ prices. Recently, for example, ACM imposed a fine on pharmaceutical company Leadiant because it increased the price of a unique drug fourteenfold without justification. In another case, ACM prohibited an extreme form of price discrimination by a dominant company, where the prices charged to various consumer groups for practically the same service differed very significantly. No economic justification was evident here either, other than the fact that market power allowed it. In such cases, ACM does intervene. However, although ACM has become more active in this area in the last couple of years, such situations remain the exception.

Preventing, weakening, and controlling market power are at the core of ACM’s competition enforcement, with a preference for prevention and weakening market power over merely controlling it. However, in order to weaken market power more effectively an additional tool is needed. ACM trusts that a new government will provide it with this new tool to ensure that markets work better in order to protect consumers, stimulate innovation and provide opportunities.

Martijn Snoep, Chairman of the Board of ACM

Martijn Snoep