In terms of competition, Honduras, is governed by Legislative Decree 357-2005 published in the Official Gazette No. 30920 of February 4, 2006 and by internal resolutions of the Commission for the Promotion and Defense of Competition (CDPC).
The law aims to promote and protect the exercise of free competition, in order to ensure the efficient functioning of the market and consumer welfare. Through it, the economic concentrations are regulated to prevent abuses by companies that have a dominant market position; and also it prohibits the commission of restrictive practices of free competition, both by nature and its effect. Furthermore, the Act facilitates the coordination and cooperation between the CDPC and the Regulatory Commissions in sectors such as: Banking and Insurance, Telecommunications and Energy.
Reference Guide for the definition of relevant market:
Recently, the CDPC prepared a Guidance Document Reference to the definition of the relevant market adapting to national legislation. The document was exposed to various professionals linked in some way to this and CENTRAL LAW Honduras was invited to participate in the exhibition.
The document was generated by consensus among competition authorities and some professional experts.
The consensus is that the market definition is not an end in itself, but a process that helps to evaluate whether practices and / or behavior of economic agents harm consumers or to the competitive process or operations concentrations Economic carry the risk of causing such damage.
The document has two main purposes: a) providing a description of the best international practices for the assessment of the relevant market; b) provide economic operators and their legal counsel, guidance on how competition authorities analyze the relevant market for the purposes of assessing the legality of the practices and / or behavior, or economic concentrations, in which the operators are currently involved or may become involved in the future.
Below I summarize the most important parts of that document:
The purpose of market definition:
The definition of the relevant market is related to the valuation of the remarkable market share is among other things, the ability of an operator to charge higher than those of a scenario of perfect competition or intense price competition.
Some practices and / or become anti-competitive business conduct when performed by those who enjoy substantial market power.
The assessment of the relevant market is useful as a screening tool for prioritizing cases in the international context.
In most cases such processes economic valuation concentration determines whether to proceed to later stages of research.
Product market and geographical market:
The product market refers to all goods or services that serve to limit the behavior of the operator that is under study as the geographic market is related to the location of operators offering such products that serve as competitive pressure . For the definition of geographic market should be considered: a) transportation costs for the consumer; b) transport costs for the supplier; c) taxes and import barriers; d) measurement problems in practice.
When defining the relevant geographical market, it is generally appropriate to consider side substitution demand and rapid replacement by the supply side.
Replacing the demand side:
The most direct way in which the pricing behavior is constrained is by replacing the demand side, this is the ability of consumers to substitute the use of one product for another in response to an increase in prices by an operator.
The definition of the relevant market for the demand side is to consider all those products that restrict the ability of people to economic under study, to cause harm to consumer welfare. Economic operators may be able to violate the process harm competition in several dimensions, such as raising prices, lower quality goods and services, reduce investment in innovation and development and in many other ways.
Two goods are considered substitutes if the price increase of one causes an increase in demand for the other. The ability of any trader to increase the price of their products as long as there is less quantity and more quality of substitutes that are available to consumers.
The basic problem underlying the assessment of the relevant market is whether enough consumers change their demand to substitute products in response to a price increase causing it unprofitable.
Understanding how the market is segmented is particularly important for these cases.
Side substitution of the offer:
Substitution of the supply side is when traders who are not currently selling a product (or operating in a geographic area) can quickly enter the market in response to a price increase by the economic operator offering and an alternative to which buyers could topple in response to the increase.
Three sources of replacement by the supply side should be considered: a) supply expansion through a change in the utilization of installed capacity; b) entrants; c) product repositioning; d) geographic market definition.
Hypothetical monopolist test:
Hypothetical monopolist test is a conceptual framework that many competition authorities use to define the relevant market. This test defines the boundaries of the market so that a “hypothetical monopolist” can increase their profits through an increase in the price that is small but significant and non-transitory; that’s why sometimes is referred to as SSNIP test (for its acronym in English).
The test focuses solely on price competition, however certain areas other dimensions of competition may be more important, such as advertising, service, innovation, variety of products, among others. This test should not be the only tool used for the analysis of the relevant market and should be used with caution.
One of the most used today for evaluation of relevant market is a test method that begins with reference to the products offered by operators under study, taking them as a candidate market. If the hypothetical monopolist could not increase prices profitably it means they have to have substitute products that are limiting the ability of monopoly to increase the price and thus should be considered as part of the market. The amount of small but significant non-transitory increase in the price used in the test, determines how tight limits have been established in the market. Therefore, a high value of the SSNIP results in wider markets because to consider a greater number of substitutes to compete before a price increase.
Analysis based on a real case:
In the analysis of competition the term “natural experiment” refers broadly to situations which analysts can learn about the behavior of a key variable from an event in real life such as product unilateral effects of a merger some important economic changes that have taken place in any market, or significant differences between different geographical regions.
One of the most popular uses of a quasi-natural experiment in the analysis of economic concentrations is the happened in the proposed merger in the United States among companies Office Depot and Staples. The US competition authority used as evidence the fact that in local markets where only operated one of these “mega stores” prices were higher compared to markets where both operated assuming everything else constant. This comparison was used as an argument to conclude that the local retailers did not represent a significant competitive pressure and therefore should not be included in the relevant market.
Competition analysis may result in two types of errors. On the one hand it may result in decisions that wrongly allow practices that harm the process of free competition and consumer welfare and on the other, can also lead to decisions that wrongly condemn practices that benefit consumers and competition.
As a general rule is not appropriate to allow market definition in itself determine the outcome of a case as the definition of the market it is only one of several tools they can use the courts and the competition authorities for valuation models impacts on competition and consumers.
It is possible to assess whether a business practice harms the process of free competition or economic concentration operation involves risks that may cause such damage without resorting to the definition of the relevant market.
Market differentiated products are superior to the definition of the relevant market methods for the selection of cases that require an in-depth analysis of the competitive dynamics.
The assessment of the relevant market almost always requires making judgments. Rarely a clear boundary between competing products and products that do not compete between them is done.
At our Legal firm in Honduras we offer local and international companies our specialized consultation in procedures related to free competition, unfair competition, and consumer protection.
By Claribel Medina
CENTRAL LAW Honduras