This presentation by Elizabeth Xiao-Ru Wang, Executive Vice President, Compass Lexecon, was made during the discussion “Economic analysis and evidence in abuse cases” held at the 20th meeting of the OECD Global Forum on Competition on 7 December 2021. More papers and presentations on the topic can be found out at oe.cd/eac.

1. OECD Global Forum on Competition
Economic Analysis and Evidence in Abuse Cases
Elizabeth Xiao-Ru Wang, Ph.D.
COMPASS LEXECON
7 December 2021

2. COMPASS LEXECON 1
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 Determining when a
firm’s behavior is an
abuse of dominance, as
opposed to a competitive
action, is “one of the
most complex and
controversial areas in
competition policy.”
DETERMINATION OF ABUSE
Source: OECD, “Abuse of dominance and monopolisation,” available at https://www.oecd.org/competition/abuse/.

3. COMPASS LEXECON 2
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
MARKET POWER AND DOMINANCE
Market
Power
•“The ability of a firm (or group of firms) to raise and maintain price
above the level that would prevail under competition is referred to as
market or monopoly power.”
Market
Dominance
•“A firm’s ability to raise its prices is usually constrained by competitors
and the possibility that its customers can switch to alternative sources
of supply. When these constraints are weak, a firm is said to have
market power and if the market power is great enough, [the firm is
said] to be in a position of dominance or monopoly.”
Source: OECD

4. COMPASS LEXECON 3
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
ASSESSING MARKET POWER AND DOMINANCE
 Often a focus of antitrust enforcement agencies (e.g., market shares, HHI, etc.)
 Subject to limitations; should be used in conjunction with other competitive
assessments
Structural Indicators
 Assessing whether the allegedly abusive conduct leads to any anti-competitive
effects in the market (e.g., reducing output, increasing prices, deterring entry,
disincentivizing investment and innovation, etc.)
Direct Evidence

5. COMPASS LEXECON 4
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
Structural Indicators

6. COMPASS LEXECON 5
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 Estimating market shares:
– Well defined relevant market to identify products and competitors
– Basis for calculation: volume-based vs. value-based
MARKET SHARES
Availability and credibility of data (e.g.,
lack of industry data)
Vertically integrated suppliers: captive
sales vs. merchant sales
Revenue sources: product, services, IP
licensing fees
Digital markets: user-based measures
(e.g., MAU, DAU, time spent), data-based
measures (e.g., platform revenue), etc.
Examples of Complexities

7. COMPASS LEXECON 6
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 The sum of squared market shares of all firms competing in the market:
𝐻𝐻𝐻𝐻𝐻𝐻 = �
𝑖𝑖=1
𝑁𝑁
𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚 𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑠𝑖𝑖
2
 Ranging from 0 (perfect competition) to 10,000 (monopolistic market)
 Market share is a measure of the relative size of an individual firm in a
market, while the HHI is a measure of market concentration across all
firms in the market.
 Complexities in calculating the HHI (e.g., how to handle small competitors)
HERFINDAHL-HIRSCHMAN INDEX (HHI)

8. COMPASS LEXECON 7
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 In general, a market share of 50%
or more, which has been stable for
a long time, is used as a common
threshold for the indication of
potential existence of market
dominance (e.g., United States,
European Commission, China, etc.).
 The specific criteria for the
determination of market dominance
may vary by jurisdiction as well as
characteristics of the relevant
market.
THRESHOLD FOR MARKET DOMINANCE

9. COMPASS LEXECON 8
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 May over- or underestimate the market
power of firms and the potential
competition effects
 May not fully reflect the competitive
constraints posed by competitors (e.g.,
in bidding or contestable markets)
 May not fully capture the dynamic
competitive pressure firms face from
product substitution
 May be unstable or uninformative due
to rapid industry growth or innovation
LIMITATIONS TO STRUCTURAL INDICATORS

10. COMPASS LEXECON 9
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
Direct Evidence

11. COMPASS LEXECON 10
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 “Historically, in the antitrust world, market power has most commonly been identified
through inference from a high market share. But direct evidence has increasingly
become important as an alternative, in part because academic economists have
developed a number of econometric approaches for measuring market power.” (Baker &
Bresnahan, 2008)
 “The [U.S. Department of Justice] … will use direct evidence of anticompetitive effects
when warranted and will not rely exclusively on market shares in concluding that a firm
possesses monopoly power.” (U.S. Department of Justice, 2008)
 “The Commission also takes other factors into account in its assessment of dominance,
including the ease with which other companies can enter the market – whether there are
any barriers to this; the existence of countervailing buyer power; the overall size and
strength of the company and its resources and the extent to which it is present at several
levels of the supply chain (vertical integration).” (European Commission, 2013)
DIRECT EVIDENCE

12. COMPASS LEXECON 11
OECD Global Forum on Competition | Economic Analysis and Evidence in Abuse Cases
 Direct evidence refers to assessing market dominance through a direct analysis of
whether the allegedly abusive conduct leads to any anti-competitive effects in the
market.
 According to classic economic literature, indications of potential existence of market
dominance include the following:
– Reduced output level (e.g., total value or units of products sold)
– Increased prices after taking into account of changes in market conditions
– Persistent high profitability
– High entry barriers (e.g., number of new entrants, cost of market entry, buyers’ ability
to sponsor entry)
– Diminishing innovation (e.g., investment, patents, new products pipelines)
DIRECT EVIDENCE