Entities with Relatively Small Market Shares May Also Be Deemed Monopolies
Six months after the amendment to the Economic Competition Law took effect, the Competition Authority published its position regarding the circumstances in which even an entity with less than a 50% market share may be deemed a “monopoly holder.”
In January 2019, the amendment to the Economic Competition Law went into effect. This amendment expanded the definition of the term “monopoly” and provided that a monopoly holder may also be one who holds “significant market power.” The questions of how “significant market power” is defined and, in particular, how the existence of such “significant market power” may be evaluated were left open by the amendment.
Therefore, the Competition Authority published its Position Paper 2/19, in which it explains how to examine the existence of significant market power, and provides a series of tools and examples for the methods of evaluation. The position paper emphasizes that market share is but one factor for the purposes of identifying a “monopoly holder” and that there may well be instances in which an entity holding less than 50% is considered a monopoly holder as well.
What Is “Significant Market Power”?
According to the Competition Authority, significant market power is “the power to set conditions of supply or purchase that are significantly less favorable than the conditions that would have been set in a competitive market.” From an economics perspective, an entity holds significant power when it is not subject to restraints, be it on the supply side or the demand side. In other words, the same body may act without real consideration of the anticipated reaction from customers, suppliers, or competitors to its conduct.
How Is the Existence of Significant Market Power Evaluated?
First, one must examine whether there are “restraining forces on the demand side” in the market. Put differently, this means whether the anticipated consumer reaction might restrain or discourage the evaluated entity from worsening the supply conditions. These may include, in addition to market share, the number and status of other competitors in the field, fluctuation in market shares, the level of differentiation between products in the field, the importance of the product to retailers, and the possibility of consumers switching from one supplier to the next.
- The larger the market share, the stronger the indication for the existence of significant market power.
- A large disparity between the market share of the evaluated entity and its competitors’ market shares indicates significant market share.
- Great differentiation between products indicates significant market share.
- Substantial barriers for consumers’ transition between different suppliers indicates the existence of significant market share.
- On the other hand, great movement in market shares indicates a lack of market power.
Next, one must examine whether there are “restraining forces on the supply side” in the market. This means whether, because of worsening conditions for consumers by the evaluated entity, more competitors (suppliers) are expected to enter the market, or whether existing competitors are expected to increase their activity in the area, and thus restrain or discourage the evaluated entity from worsening the conditions of product supply to consumers. This question can be answered by examining the entry barriers and the ability to expand in the relevant market.
In order to establish that a certain entity holds significant market power, the answer on both sides (supply and demand) must be in the negative. That is, the anticipated reaction of consumers and other or potential suppliers does not substantially discourage the evaluated entity from worsening the conditions of supplying its product. In light of the difficulty in conducting the evaluation, the Authority notes that past conduct by the evaluated entity in the market may indicate that it holds significant market power, coupled with the examination of the market and product characteristics.
When Is a Relatively Small Market Share Holder Considered a Monopoly Holder?
In its position paper, the Competition Authority notes there may well be instances in which an entity holding a relatively small market share constitutes a monopoly holder. Such a case may be possible when there is a large gap between the market share held by the largest player and the market share of other competitors. Another case may be where the entity does not sell directly to the end consumers, but to retailers or intermediaries, for whom it is important to sell these products to consumers.
The Competition Authority wishes to emphasize that not every entity selling at a price higher than its production costs is considered a significant market power holder and that high profitability in and of itself is not sufficient evidence of this. The Authority also emphasizes that the law does not prohibit the very holding of a significant market share, but only its abuse. Therefore, the finding that an entity holds significant market power would never be sufficient to establish a violation of the law. Rather, an additional foundation of conduct amounting to unreasonable refusal to supply a product or abuse of power is always required, too, for a monopoly holder to be seen as violating the law.
What Does This Mean in Practical Terms?
On the monopoly level – The Economic Competition Law prohibits monopoly holders (who, going forward, are any entity with significant market power as well) to act in ways that amount to an unreasonable refusal to supply a product or to abuse its monopoly power. The law also sets a series of criminal and administrative sanctions on monopoly holders who violate such prohibitions. Practically speaking, in an era of self-assessment, once the law imposes restrictions on a monopoly holder in terms of its business conduct and prevents it from taking steps that are permissible for other business owners, then going forward it is insufficient for a business entity to examine only its own market share. An evaluation of “significant market share” is also required prior to making business decisions that may be forbidden for monopoly holders.
On the restrictive trade arrangements level – Some of the most common “block exemptions” established by the Competition Commissioner, which allow entities to enter into restrictive trade arrangements under certain circumstances and subject to certain conditions, do not apply when one party to the arrangement is a monopoly holder (be it through a market share of over 50% or through significant market power). Practically, vertical arrangements that could have been entered into based on one exemption or another now require the Commissioner’s prior approval.
On the mergers level – The change in the definition of monopoly holder was not extended to the mergers chapter. Therefore, evaluating the need for submitting a merger notice in the merger to monopoly option or a merger with a monopoly holder party was left only in terms of instances in which the market share is over 50%. In other words, even if a corporation has a share of 45% in a certain market, but has significant market power, the monopoly option still does not apply to it for purposes of filing a merger notice.