Potential competition

 

Author Definition

 

Definition

The elimination or substantial reduction of potential competition can be as harmful as the elimination of already existing, actual competition between rivals. Agreements not only between actual competitors but also between potential competitors that restrict competition are generally prohibited by antitrust laws, and the unilateral conduct of firms with significant market power that forecloses potential rivals may also be deemed anticompetitive similarly to the foreclosure or raising costs of actual rivals. Additionally, a merger with a potential competitor, or a merger that makes potential competitors’ expansion more difficult, can have anticompetitive effects similarly to mergers between direct competitors who are already active on the same market.

 

Commentary

A potential competitor, although not yet entered the relevant market, may already exert some competitive constraint or it will likely do so in the foreseeable future, and the loss of such constraint could lead to anticompetitive effects. The question whether there is potential competition that should be preserved in a given case is often a difficult one, and it should always be examined in light of the structure of the specific market, and the economic and legal context within which it operates. (See, for example, Case C-307/18 Generics (UK) and others v CMA (Paroxetine), 2020).

The loss of potential competition presupposes that the parties to an agreement or merger are at least potential competitors. The European Court of Justice stated in Paroxetine that in order to be deemed a potential competitor, the firm cannot face any insurmountable barriers to entry, it has to have real and concrete possibilities of joining the relevant market and competing with one or more of the firms already competing in that market. (Generics (UK), pp 44, 45) The perception of the established operator in a market is also among the relevant factors to consider. If another firm is perceived as a potential entrant by such operator, then this fact in itself may, by reason that such perception exists, already give rise to competitive pressure on the operator who is established in that market. (Generics (UK), p 42)

In Paroxetine, the ECJ held that under Article 101(1) TFEU an originator pharmaceutical company who is the holder of a manufacturing process patent for an active ingredient that is already in the public domain, on the one hand, and the manufacturers of generic medicines who are preparing to enter the market of the medicine containing that active ingredient, on the other hand, and who are in dispute as to whether that patent is valid or whether the generic medicines concerned infringe that patent, are potential competitors for the purposes of Art 101 TFEU, provided that the generic manufacturer has in fact a firm intention and an inherent ability to enter the market and it does not face insurmountable barriers to entry. The Court further noted that the existence of the manufacturing process patent of the active ingredient cannot, as such, be regarded as an insurmountable barrier of entry, and the genuineness of the parties’ patent dispute, particularly when it is the subject of court proceedings, is evidence of an already existing potential competitive relationship between them. (Generics (UK), pp 46 and 52)

Similar tests for identifying potential competitors are found in the soft laws of several competition authorities. In the context of collaborations among competitors, for example, the FTC and the DOJ consider a firm a potential competitor, and consequently treat it the same as an actual competitor for the purposes of assessing collaborations among them, if there is evidence that entry by that firm is reasonably probable in the absence of the collaborative agreement in question, or that competitively significant decisions by actual competitors are constrained by concerns that anticompetitive conduct likely would induce the firm to enter.

DG Comp, in the context of technology transfer agreements, considers a firm a potential competitor (and treats it as an actual competitor) if it is likely, in the absence of the technology transfer agreement, the firm would undertake the necessary additional investments to enter the relevant market in response to a small but permanent increase in product prices. Such entry is more likely if the licensee possesses assets that can easily be used to enter the market without incurring significant sunk costs or if it has already developed plans, or otherwise started to invest, to enter the market.

In merger review, a merger with a potential competitor could be problematic if the potential competitor possesses such assets or where the merging partner is very likely to incur the necessary sunk costs to enter the market in a relatively short period of time after which this company would constrain the behaviour of the firms currently active in the market. To assess the degree of the anticompetitive effects of the merger, all potential competitors in addition to the actual competitors should be identified. For a merger with a potential competitor to have significant anti-competitive effects, two basic conditions must be fulfilled under the EC horizontal guidelines: (i) the potential competitor must already exert a significant constraining influence or there must be a significant likelihood that it would grow into an effective competitive force, and (ii) there must not be a sufficient number of other potential competitors, which could maintain sufficient competitive pressure after the merger.

The potential competition doctrine is traced back to the Clayton Act and said to be fallen on hard times in the past decades due to rigorous economic scrutiny and high evidentiary standards set by some courts. Today, however, when faced with oligopolistic markets with high barriers to entry, it is important to focus more on preserving dynamic competition through safeguarding potential competition, innovation competition and other aspects of future competition. The importance of the potential competition doctrine is also increasing as competition authorities are encouraged to scrutinize more the so-called “killer acquisitions” by big tech and pharma companies.

 

Bibliography

Antitrust Guidelines for Collaborations Among Competitors, issued by the Federal Trade Commission and the U.S. Department of Justice, April 2000.

Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements (2014/C 89/03), para 31.

Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (2004/C 31/03), para 58-60.

Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission Issued April 2, 1992, revised April 8, 1997, Para 1.32.

Big Tech Acquisitions and the Potential Competition Doctrine: The Case of Facebook Mark Glick and Catherine Ruetschlin, Working Paper No. 104 October 2019;see also The Law of Antitrust, An Integrated Handbook, by Sullivan, Grimes and Sagers, 3rd Edition, 2016.

Killer Acquisitions, by Cunningham, Ederer and Ma, Journal of Political Economy, 2021; see also fn 6.

This article is being reviewed by the Editors of the Dictionary.

Author

  • DG COMP (Brussels)

Quotation

Paul Csiszar, Potential Competition, Global Dictionary of Competition Law, Concurrences, Art. N° 12182

Visites 5734

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Pressure exercised upon incumbent firms by the possibility that new or existing firms will enter a specific market (potential competitor). New entrants may be attracted by above normal profits made in this market by incumbent firms, possibly as a result of weak competition. Additional firms entering the market will increase the overall quantity supplied with the effect that prices fall and above normal profits disappear. Thus, the possibility of market entry has a certain "disciplinary effect" on the behaviour of incumbents. However, the threat of potential competition is relatively small when entry barriers are high.

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