The EU Courts and the Commission often classify cost structure and economies of scale as barriers to entry and exit from the market. The ECJ201 stated in several cases (United Brands202, Hoffmann Roche203
antitrust self-assessments in the maritime transport sector today can be found in those general guidelines.”
200 Pozdnakova (2008) op. cit. p. 258
201 In fact, during the administrative procedure, the applicants (TACA) produced various articles from the specialist press stating that APL and COSCO intended to enter the market in the short term. This however did not constitute a convincing argument, as the Court’s ratio was in favour of potential competition; should consolidation of market share (through joint ventures) become a defence mechanism against potential market share loss proves the (successful or unsuccessful) effort of the alliance to discourage potential competition. The CFI said: “...the fact that a
91 and BPB Industries204) that large capital investments and economies of scale are considered as barriers to entry. The matter is subject to debate among jurists and economists, thus it cannot be fully addressed on its merits within this section; however, I shall present how these barriers affect potential competition within a shipping market.
In practice, regardless of the degree of concentration that exists in a certain market, these factors are primarily taken into account by a potential ship-operator before deciding to join a consortium or a pool.
The cost structure and the availability of capital constitute essential conditions to enter the market because of the great amount of investment and liquidity required in order to operate a vessel. Of course, economies of scale in themselves are not an ad hoc barrier to entry or a reason for dominance205. Economies of scale allow companies to achieve the lowest possible cost and capture shares of the market to the least efficient scale of production. Perhaps an economy of scale can be deemed as an achievement of efficient shipping entrepreneurship from which the consumer is directly benefited; an altera pars on behalf of consortium participants. They claim that even where large incumbents entered into widespread exclusivity agreements with independents and shippers, an entrant would be able to compete by incurring the same losses or offering the same or lower prices. This matter is analysed further below.206
number of shipping lines, in spite of their links with the TACA parties on other trades, entered the transatlantic trade outside the TACA between 1997 and 1998 does not necessarily show that those lines represented significant potential competition during the period covered by the contested decision”, TACA ibid. paras 1025 and 1026.
202 United Brands op. cit. para 122
203 Hoffmann La Roche op. cit. para 49
204 BPB Industries op. cit. para 116. The issue of economies of scale has been partially addressed, since the key issue has been the fact that BPB Industries had 90% market share.
205 Nazzini Renato, The Foundations of European Union Competition Law: The Objective and Principles of Article 102 [Oxford University Press, 2011] p. 347
206 See section 2.2.1.4 Relative Market Shares among Competing Shipping Companiesp.109
92 However, markets can be manipulated and legitimate benefits can become tools of exploitation; hence, economies of scale combined with additional factors may give rise to a dynamic barrier to entry. For example, in INTEL (2009)207 the Commission found that, in addition to the economies of scale, sunk costs have also been a decisive factor.
Thus, a dominant undertaking could discourage entry by committing to, or establishing a reputation for, a practice that denies an entrant a minimum efficient scale. Nazzini (2009) 208 considers that this can be materialised in two stages: “Ex ante”, where entry becomes too risky and “ex post”, where economies of scale may contribute to a dominant undertaking’s ability to foreclose competitors who face much higher costs by implementing exclusionary above-cost price cuts.
There is always a bundle of conditions that contribute to the distortion of competition and market power, though these conditions are not organized into a unified checklist.
As Nazzini (2009) observes, the case law and the Commission practice considered economies of scale contributors to a dominant position without an integrated analysis of all the other factors relevant to the
207 It was held: “Therefore, in the light of: (i) the significant sunk costs in research and development, (ii) the significant sunk costs in plant production and (iii) the resulting significant economies of scale which mean that the minimum efficient scale is high relative to overall market demand, it can be concluded that there are significant barriers to entry in the market.” See: Intel 2009, Commission Decision of relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement [2009, COMP/C-3 /37.990] para 866
208 See: Nazzini (2011) op. cit. p. 347, where he criticizes this inconsistent practice in determining the critical market share: “The case law and the Commission practice, however, have sometimes considered economies of scale as contributing to a dominant position without an integrated analysis of all the other factors relevant to the dominant undertakings ability to harm competition. The elements that contribute to a dominant position are simply listed almost as if it were possible to pick a number of factors at random as long as they are in the abstract capable of being barriers to entry and happen to be present on the facts of the case”.. However, one must also take into consideration that the ECJ does not confine itself to the specific wording of the Treaties, nor it is always bound by the legal precedents. Its reasoning is “teleological”, meaning it aims the goals of the Treaties by using every legal theory. So perhaps the references of ECJ may not be exhaustive enough, however they do not show a lack of legal reasoning. See also: Dabbah (2004) op.cit.
p. 342.
93 dominant undertaking's ability to harm competition. In order to discover these conditions the correct approach would first be to assess the gravity of all the barriers in question, in the context of a maritime market; as regards the economies of scale, by determining the essential costs of setting up a service at a level comparable to that of the allegedly dominant carrier or carriers209.
In this context, the benefits that derive from the management of cost structure and economies of scale become relevant once they are combined with other indicators that contribute to market power. In TACA210, the CFI examined whether the TACA Conference had abused its collective dominant position. The Court examined, among many issues, whether the element of economies of scale constituted a barrier to entry for potential entry. There have been two significant findings from their examination of the facts:
i) The elements of cost and economy of scale are related more to the potential competition than to the actual. It is a pure barrier to entry that contributes to the dominance that acquires additional gravity according to the circumstances. For instance, in TACA (conference) the parties were found to hold a dominant position in the relevant market - that, in view of the links existing between the TACA parties on other trades, it was probable that if those shipping lines entered the transatlantic trade, they would do so by becoming members of the TACA211.
209 Atlantic Container Line AB (TACA) and Others vs Commission (TACA Judgment), Joined Cases T-191/98, T-212/98 to T-214/98, CFI [2003] ECR II-3275 op. cit. para 1017.
210 TACA Judgment (2003) ibid. paras 1024-1026
211 TACA Judgment (2003) ibid. para 1006
94 ii) The economies of scale benefit, in two ways, the dominant party: a) it allows it to pool and adjust transport capacity and b) its control over the market allows it to pass on these savings achieved by economies of scale and efficiency by granting rebates, in order to ensure further loyalty of its customers.212
iii) Dominance reduces not only internal competition but has an effect on the objectives of the economy of scale. This practically means that the cost and economy of scale are discouraging factors for potential entrants (in the form of original investment and the sunk costs involved in case of business failure).
iv) What should be combined with other conditions may also drive existing competitors to enter the established joint venture agreements in order to effectively deal with the matter. It is on these grounds that the Commission in TACA held that the fact that all these entries [n.b. the new entrants into the market in question] took place after the period covered by the contested decision is irrelevant;
deciding an abuse by effect.213