First-mover advantages

Many dominant firms are the first "important" competitor in their industry.^[7] These firms can achieve short- or long-term advantages over their competitors when they are the first offering in a new industry. First-movers can set a benchmark for competitors and consumers regarding expectations of product and service offering, technology, convenience, quality, or price.^[8] These firms are representative of their industry and their brand can become synonymous with the product category itself, such as the company Band-Aid. First-mover advantage is a limited source of market dominance if a firm becomes complacent or fails to keep up innovation by competitors.^[9]

Innovation

It is recognised that firms who place greater importance on product innovation often have an advantage over firms who do not.^[10] The significant links to Game theory have are apparent, and in conjunction with empirical evidence, research has attempted to explain whether more dominant firms or less dominant firms innovate more.^[11]

Brand Equity

Referring to the value that branding adds over a generic equivalent, Brand Equity can contribute to gains in market dominance for firms who choose to capitalise on its worth, whether through charging a price premium or other business strategy.^[12]

Economies of Scale

As firms expand, production becomes more efficient and costs lower.^[13] It has been shown in empirically several times that there is a clear link between profitability and market share, and thus market dominance.^[14] The explicit relationship between economies of scale and market shares has also been explored.^[15]

Market share

There is often a geographic element to the competitive landscape. In defining market dominance, one must see to what extent a product, brand, or firm controls a product category in a given geographic area.^[17] There are several ways of measuring market dominance. The most direct is market share. This is the percentage of the total market served by a firm or brand. A declining scale of market shares is common in most industries: that is, if the industry leader has say 50% share, the next largest might have 25% share, the next 12% share, the next 6% share, and all remaining firms combined might have 7% share.

Market share is not a perfect proxy of market dominance. Although there are no hard and fast rules governing the relationship between market share and market dominance, the following are general criteria:^[18]

• A company, brand, product, or service that has a combined market share exceeding 60% most probably has market power and market dominance.
• A market share of over 35% but less than 60%, held by one brand, product or service, is an indicator of market strength but not necessarily dominance.
• A market share of less than 35%, held by one brand, product or service, is not an indicator of strength or dominance and will not raise anti-competitive concerns by government regulators.

Market shares within an industry might not exhibit a declining scale. There could be only two firms in a duopolistic market, each with 50% share; or there could be three firms in the industry each with 33% share; or 100 firms each with 1% share. The concentration ratio of an industry is used as an indicator of the relative size of leading firms in relation to the industry as a whole. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the combined market share of the four largest firms, as a percentage, in the total industry. The higher the concentration ratio, the greater the market power of the leading firms.

Legally, the determination is often more complex. A case that can be used to define market dominance under EU Law is the United Brands v Commission (The ‘bananas’ case) where the court of justice said, 'the dominant position thus referred to by Article [102] relates to a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers’^[19] The commission's Guidance suggests that market shares is only a ‘useful first indication’ in the process of assessing market power.

Impact on competitors

Another way of calculating market dominance, by looking at competition as market shares, are even less useful when assessing the competitive pressure that is exerted on an undertaking – i.e. the competition that would come from other firms that are not yet operating on the market but have the capacity to enter it in the near future. Of particular importance here are paragraphs 16 and 17 of the commission's Guidance...16. Competition is a dynamic process and an assessment of the competitive constraints on an undertaking cannot be based solely on the existing market situation. The potential impact of expansion by actual competitors or entry by potential competitors, including the threat of such expansion or entry, is also relevant. An undertaking can be deterred from increasing prices if expansion or entry is likely, timely and sufficient. For the commission to consider expansion or entry likely it must be sufficiently profitable for the competitor or entrant, taking into account factors such as the barriers to expansion or entry, the likely reactions of the allegedly dominant undertaking and other competitors, and the risks and costs of failure.

The Guidance also states that the constraints imposed by the credible threat of future expansion by actual competitors, or entry by potential competitors, is a required factor of consideration. For example, Intellectual Property in the form of patent protection, is a potential legal barrier to entering the market for new businesses, as was shown in Microsoft Corp. In this case, the Court of Justice confirmed the commission's decision, that Microsoft were dominant and had abused their dominant position regarding their refusal to supply the interoperability information for operating PC Windows with other systems. Microsoft was forced to license out its interoperability data.

Herfindahl–Hirschman index

There is also the Herfindahl–Hirschman index. It is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is defined as the sum of the squares of the market shares of each individual firm. As such, it can range from 0 to 10,000, moving from a very large amount of very small firms to a single monopolistic producer. Decreases in the Herfindahl–Hirschman index generally indicate a loss of pricing power and an increase in competition, whereas increases imply the opposite.

Kwoka's dominance index (${\displaystyle {\text{D}}}$) is defined as the sum of the squared differences between each firm's share and the next largest share in a market:

${\displaystyle {\text{D}}=\sum _{i=1}^{n-1}(s_{i}-s_{i+1})^{2}}$

where

${\displaystyle s_{1}\geq ...\geq s_{i}\geq s_{i+1}\geq ...\geq s_{n}}$ for all ${\displaystyle i=1,...,n-1}$.^[29]

As part of its merger review process, Mexican Competition Commission uses García Alba's dominance index (${\displaystyle {\text{ID}}}$), described as the Herfindahl–Hirschman index of a Herfindahl–Hirschman index (${\displaystyle {\text{HHI}}}$). Formally, ${\displaystyle {\text{ID}}}$ is the sum of squared firm contributions to the market ${\displaystyle {\text{HHI}}}$: ${\displaystyle {\text{ID}}=\sum _{i=1}^{n}h_{i}^{2}}$ where ${\displaystyle h_{i}={\frac {s_{i}^{2}}{\text{HHI}}}.}$

Asymmetry Index (${\displaystyle {\text{AI}}}$) is defined as the statistical variance of market shares: ${\displaystyle {\text{AI}}={\frac {\sum _{i=1}^{n}\left(s_{i}-{\frac {1}{n}}\right)^{2}}{n}}.}$ ^[30][31]

Customer power

Countervailing Buyer Power is something else that should be considered when calculating market dominance. In market where the buyers have more power than suppliers in determining prices or changes in the market a firm of high market share may not exercise its powers against competitors easily as it always has to be accountable to customers that give it its high market share and are not hesitant to switch product preference to the next firm. Such customers will need to have sufficient bargaining strength which will normally come from its size or its commercial significance in the industry sector.

The final point that must be considered is the bargaining strength of the undertaking's customers, also known as the countervailing buyer power. This refers to the competitive constraints that customers may exert where they are a large size, or commercially significant, for a dominant firm. However, the commission will not come to a final decision without examining all of the factors which may be relevant to constrain the behavior of the undertaking.^[16]

Previous findings of dominance can not be used to calculate dominance as agreed in the Coca-Cola v Commission [2000] case where it was Court held that the Commission must take a fresh approach to the market conditions each time it adopts a decision in relation to Art 102.