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EUROPEAN COMMISSION DG Competition - page 19 / 113





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undertaking having a legal monopoly in a relevant market. Planning laws and licensing laws that impose limits on the number of retail outlets limits expansion possibilities of existing and entry possibilities for new retailers, which in turn may make it more difficult for suppliers to gain access to efficient distribution. Intellectual property rights may also prevent expansion and entry or make it more difficult. However, intellectual property rights do not as such confer dominance on the holder. The impact of intellectual property rights on expansion and entry depends on the nature and actual strength of the intellectual property right held by the allegedly dominant undertaking. Finally, also tariff and non- tariff barriers can give advantages to incumbent firms.

Capacity Constraints: Competitors may have to commit large sunk investments in order to expand capacity. An investment or cost is sunk when it cannot be recovered if the undertaking exits the market. Moreover, even existing excess capacity may be so expensive to employ that these costs constitute a barrier to expansion; for instance, the costs of introducing another shift in a factory may constitute a barrier to expansion.

Economies of scale and scope: Large-scale production or distribution may give the allegedly dominant undertaking an advantage over smaller competitors. Scale and scope economies result from the spreading of fixed costs over larger output or a broader set of products, leading to a reduction of average costs. When economies of scale or scope are important and require a substantial production capacity compared to the size of the market, efficient expansion or entry is more costly and risky. Large fixed costs have to be committed and the output produced will constitute a significant increase in output, which is likely in itself to have a significant impact on price post expansion or entry. If expansion or entry occurs at an inefficient scale, the competitive constraint imposed on the incumbents will be less effective. In assessing barriers to expansion and entry it is therefore useful to consider the minimum efficient scale in the market concerned. The minimum efficient scale is the level of output required to minimise average cost, exhausting economies of scale.37

Scale economies are normally exhausted at a certain point. Thereafter average costs will stabilise and eventually rise due to, for example, capacity constraints and bottlenecks.

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