The new Hong Kong competition regulator is busy formulating draft guidelines on interpretation, investigation procedures and the handling of complaints under the still-new Competition Ordinance, prior to it entering into full effect.  The guidelines are also expected to include indicative market power thresholds that would trigger an abuse of dominance investigation.

The use of thresholds elsewhere

  • In Australia, there is no bright-line test as to when a high market share will amount to a substantial degree of market power, and the court is required to consider the whole of the available evidence in assessing whether there has been a contravention of section 46 of the Competition and Consumer Act 2010 (Cth).
  • In the EU, where Article 102 prohibits the abuse of a dominant position, the EC’s general rule of thumb is that a company is unlikely to be considered as having a “dominant position” if it has market share of less than 40%.
  • In the US, where section 2 of the Sherman Act prohibits the monopolization of trade, the possession of monopoly power is a prerequisite to an offence, however the Department of Justice has not issued any indicative guidelines.

Why have a threshold?

Use of market share as a proxy for market power has been criticised by some as ignoring other important market information, including the ability of competing firms to expand, or of new competitors to enter the market.

However, many argue that thresholds of this nature will offer guidance and increase legal certainty as to the operation of the Competition Ordinance.  This might be particularly important in the context of a new regime in Hong Kong, where the market players are still largely sceptical or wary of the soon-to-be-effective competition regime.

What should the threshold be?

Hong Kong is renowned for having high level of concentration in certain industries, thanks to the traditional dominance of a few powerful tycoons.

It is understood that the legislative intent is to affect more entities than the EC guidelines do, with a 25% threshold raised in the Legislative Council during initial debate of the Ordinance.  Ms Wu, the chairwoman of Competition Commission in Hong Kong, has recently said that the Hong Kong Competition Commission would see if there was “justification” for adjusting that figure.  However, the regulator must act with caution so as not to tie its hands in its investigations once the Ordinance takes effect.

Other than the threshold?

As a market share threshold would be indicative rather than conclusive evidence of market power, other factors such as the height of barriers to entry and expansion due, for example, to entitlements to licences, financial strength and the manner in which the relevant business has conducted itself towards competitors and/or customers will be relevant in determining whether an entity has market power.

The decision to adopt a threshold is consistent with the Hong Kong Legislative Council’s intention that the Ordinance be administered in accordance the EC’s approach, at least in relation to the prohibition on abuses of dominance.

The guidelines are expected to be released in draft in September 2014 and then introduced to the legislature later this year, with the Competition Ordinance and Competition Commission to be in full operation in the first half of next year.