economic foundation & analysis - lear · lear– laboratorio di economia, antitrust,...

Lear - Laboratorio di economia, antitrust, regolamentazioneLear - Laboratorio di economia, antitrust, regolamentazione

Economic Foundation & Analysis

TrentoSummerSchoolonAdvancedEUCompetitionLaw&Economics

PaoloBuccirossi

Moena,June15,2015


Foundation

Lear – Laboratoriodieconomia,antitrust,regolamentazione 3

Notionsofefficiency

§ Allocativeefficiency:a(static)propertyofamarket (thesystemthroughwhichtheexchangeofproductsoccurs)

§ Productiveefficiency:a(static)propertyoftheproductionprocess (i.e.thesystemthroughwhichgoodsandservicesareproducedanddistributed)

§ Dynamicefficiency:apropertyofthesystemofproductionandexchangetobeassessedovertime


Allocativeefficiency

§ Allocativeefficiency

§ Allconsumersthatderivefromtheconsumptionofaproductabenefitlargerthanthesocialcostofproducingthesamegoodareallowedtoconsumetheproduct

§ Allconsumersthatderiveabenefitlowerthanthesocialcostofproducingthesamegoodareexcludedfromtheconsumptionoftheproduct


Productiveefficiency

§ Outputisproducedwiththeminimumamountofinput(technicalefficiency),and

§ Outputisproducedattheminimumcost(economicefficiency)


Dynamicefficiency

§ Innovation

§ New(moreefficient)productionprocesses§ Newproducts(betterqualiy,moredifferentiated)§ Newdistributionsystems(e.g.ecommerce)


Competition(Rivalry)andthemarket

• Competitionisacharacteristicofthe“market”(exchangesystem)• Itdetermines:

• Who(firms), onthesupply side,willactuallysell theproduct• Who(consumers), onthedemandside,willactuallybuy theproduct• Whichtransactionswilltakeplaceandwhichwillnot(howmuchof theproductwillbeexchanged)

• Competitionaffectstheallocation ofscarceresources


Marketsand(price)signals

• Marketssend(price)signals

• Sellersandbuyersmaketheirdecisionsbasedonthesesignals

• (Perfect)competition=sellersandbuyersindividually donothavethepower toalterthesignal


Competitionasaselectionmechanism

Competitivesignalsperformaselection function:

1. Selectsellerswiththelowestproductioncost

2. Selectbuyerswhohavethehighestevaluation

3. Selectthetransactionsthataresociallydesirable


Marketpower

§ Marketpower:theabilityofoneormorefirmstopriceabovetheperfectlycompetitivelevel

§ LernerIndex𝐿 =

𝑝 −𝑚𝑐𝑝

§ L=0(perfectcompetition);L=1(maximummarketpower)§ Marketpowerdeterminesaninefficientallocationof

resources


Productiveefficiencyandcompetition

§ Competitionandproductiveefficiency

§ Economiesofscale

§ Moreefficienttoconcentrateproductionwithin“few”firms,possiblyone(naturalmonopoly) D

MC1MC2

Q2 Q1

p2

p1 AB

p

Q


Dynamicefficiencyandcompetition

§ Competitionanddynamicefficiency

§ Twoeffectsofcompetition§ Escapecompetitioneffect§ Schumpeterianeffect

§ Innovationdependsonincentives

§ Inverted-Urelationship

Inno

vatio

n

low

high

low highCompetition


Analysis

Lear – Laboratoriodieconomia,antitrust,regolamentazione

Aframeworkforassessingmarketpower

§ Marketpowercanexistinavarietyofcontexts:§ insomemarkets,asingleundertakingmaypossessmarketpower(unilateraleffects)

§ inothermarkets,anumberofundertakingsmaycollectivelypossessmarketpower(coordinatedeffectcs)

§ Itisnecessarytohaveaconceptualframeworktoassesswhether andtowhatextentmarketpowerexists

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The“old”economicassessmentframework

§ Thetraditionalapproachforassessingmarketpowerreliedonthecausallinkbetweenstructure–conduct–performance

§ Mainfocusonstructuralfactors

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Structuralanalysis:steps

§ Step1:Definearelevantmarket(productandgeographic)

§ Step2:Analysethesupply-sidestructureofthemarket§ Numberofcompetitors§ Marketsharesandconcentrationindexes§ Verticalintegration;etc.

§ Step3:Assessbarrierstoentry(potentialcompetition)

§ Step4:Assesscountervailingbuyerpower(ifany)

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Moderneconomicapproach:developingatheoryofharm

§ Inthelatestyears,antitrustauthoritiesfocusedonarticulatinga“theoryofharm” behindacompetitionconcern

§ The theoryofharmisastory thatexplainswhyanagreementbetweentwoormorefirmsorapracticeengagedbyafirmmayharmcompetitionandadverselyaffectconsumers

§ Itdoesnotonlytakeintoaccountthestructuralfeaturesofthemarketbutalsotheincentivesandtheabilityofthefirmsinvolved

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Theoryofharm:elements

Awelldevelopedtheoryofharm:§ shouldarticulatehowcompetitionand,ultimately,

consumerswillbeharmedbythepracticeunderexamrelativetoanappropriatelydefinedcounterfactual

§ shouldbeconsistentwiththeincentivesandtheabilityofthepartiesinvolved

§ shouldbeconsistentwiththeavailableeconomictheory§ shouldbeconsistentwiththeavailableempiricalevidence

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Theoryofharm:statements

Atheoryofharmandthejustificationsofthevariousnodesofthestorywillmakeemergetwocategoriesofstatements:1. Factualassertions:description– andpossiblyquantification

– ofaneconomicphenomenon§ e.g.XandYaretheclosestcompetitors;consumersface

highswitchingcosts;demandpriceelasticityis1.6

2. Logicalpropositions:areasoningthat,onthebasisofasetofpremises,(i.e.somefactualassertions),derivesaconclusion§ e.g.switchingcostswouldpreventanewentrantfromreachinganefficientscaleandwouldimpedeentry

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Theoryofharm:testingthestatements

§ Ingeneralafactualassertioncanbeeithertrue orfalse§ Whenafactualassertioncontainsestimatesitis

impossibletoexpresssuchaclear-cutopinionandthejudgementitcanonlyconcernthereliability orrobustnessoftheestimates

§ Alogicalpropositionisvalid orinvalid§ internalconsistency:conclusionsmustlogicallyfollow

fromthepremises§ economictheory:conclusionarerelatedtothepremises

byanestablishedorsoundeconomictheory

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Someexamplesofunsatisfactorytheoriesofharm:marginsqueeze

§ Whatisthepropercounterfactual?§ Alowerwholesaleinputprice(constructiverefusaltodeal)?§ Anhigherretailprice(predation)?

§ Verydifferentstatementstobetested…Ifpredation:§ needtoestimateavoidabledownstreamcostsandprove

“sacrifice”§ foreclosureunlikelyifnotdominantindownstreammarket§ someevidenceofrecoupmentnecessary§ noneedtoprovetheindispensabilityofinput

§ Implications§ Remedies(totallydifferentfordomco,rivalsandconsumers)§ Damages– ifpredationonlylossofprofit,passingonarguments

irrelevant,etc.

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Someexamplesofunsatisfactorytheoriesofharm:on-linesalesban(PierreFabre)

§ PierreFabre:20%ofthemarketforhigh-endcosmetics§ Defactobanofon-linesales§ ECJ(preliminaryruling):inthecontextofaselective

distributionsystem,acontractualclauserequiringsalesofcosmeticsandpersonalcareproductstobemadeinaphysicalspacewhereaqualifiedpharmacistmustbepresent,resultinginabanontheuseoftheinternetforthosesales,amountstoarestrictionbyobjectwithinthemeaningofthatprovision

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§ therearelegitimaterequirements,suchasthemaintenanceofaspecialisttradecapableofprovidingspecificservicesasregardshigh-qualityandhigh-technologyproducts,whichmayjustifyareductionofpricecompetition infavour ofcompetitionrelatingtofactorsotherthanprice (par.40)

§ Theaimofmaintainingaprestigiousimageisnotalegitimateaimforrestrictingcompetition(par.46)

§ Whatisthetheoryofharm?§ Reducingintra-brandcompetition?§ WhatisthePierreFabreincentiveofdoingso?

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§ Manufacturer’sprofitsΠ=(w – c)*Q(p,s)

§ w =wholesaleprice;c =manufacturer’smarginalcost;Q(p,s) =downstreamdemand,whichdependsonp =retailpriceands=demandenhancingfactors,suchasancillaryservicesorbrandimage

§ ManufacturerisbetteroffifQ(p,s)ishigher;generallysoareconsumers

§ Ifaselectivedistributionsystemis“efficient”thismeansthatitimpliesacombinationofp ands suchthatQ(p,s)ishigher,eventhoughitentailsanhigherp

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§ Whatistheconsumerwelfareconsequencesofon-linesalesiftheyincreasepricecompetition?

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Theoryofharm:broadcategories

§ Individualtheoriesofharmarenumerousandspecifictothecaseatstake

§ However,mostdrawonalimitednumberofcommonpotentialsourcesofcompetitiveharm:§ Softeningcompetition/unilateralmarketpowerOneormorefirmshavealowerincentivetocompeteaggressivelyandcanunilaterallyexercisesmarketpower§ CollusionTwoormorefirmscoordinatetojointlyexercisemarketpower§ ForeclosureA firmreinforcesorprotectsitsmarketpowerbyexcludingequallyefficientcompetitorsfromthemarket

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Softeningcompetition

§ Oneormorefirmsundertakeapracticesuchthatlowerstheirincentivestocompeteaggressively

§ Examples§ Mergerbetweentoclosecompetitors:unilateraleffects

§ Bestpricingpolicies§ PriceMatchingGuarantee§ Parityclause

§ Softeningcompetitiontheoryofharmisbasedonanalterationofastaticgame

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Collusion

§ Coordinationofmarketstrategies(prices,outputetc.)suchastoraiseprofitsandharmconsumers

§ Coordinationoccursthroughadynamicinteraction(repeatedgame)

§ 3Problems:§ Coordinationproblem:findingthetermsofcoordination§ Enforcementproblem:curbingfirms’incentivetodeviate

throughapunishmentmechanism§ Externalstability:impedingdisruptiveactionsbyfringe

competitorsand/orbuyers

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Foreclosure

§ Raisingrivals’costsstrategy- RRC§ thedominantfirmimpedestheaccesstoanessentialinputortoamoreefficientinput

§ Loweringrivals’demandstrategy- LRD§ theincumbentreducesthedemandthatisavailabletonewentrantstillisnolongerprofitableenteringthemarket

§ Outputstrategy§ thedominantfirmdoesnotaffectneitherthecostorthedemandofcompetitors,butmightchooseitsoutputlevelsoastobringpriceatalevelthatwouldmakeentryunprofitable

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Case#1:GE/Instrumentarium


GE/Instrumentarium

§ AcquisitionbyGeneralElectricCompany(US)ofsolecontrolofInstrumentariumOYJ (Finnish)

§ Productmarket:Variousinstruments(perioperativemonitors,patientmonitors,criticalcaremonitors,allofthemseparate)

§ Geographicmarkets:national

§ Theoryofharm:Unilateraleffects,eliminationofaclosecompetitor

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Somequestions

§ WhatkindofevidencedidtheCommissionexaminetoassessthe“closenessofcompetition”betweenGEandInstrumentarium?

§ Whentendersareinvolved,sometimeeachtenderisdefinedasaseparaterelevantmarket.Whythisisnotthecasehere?Howdidtheexistenceoftenderingproceduresaffectedtheassessmentofthecase?

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Marketfeatures

§ Stableandmaturemarket

§ Tenderingprocedures(withdetailedspecificationsand“mosteconomicallyadvantageous”proceduresratherthan“lowestprice”)§ About60%to100%salesaremadethroughatenderingprocedure

§ Theanesthesiologist(primaryuserofthisequipment)playsanimportantroleinmakingthechoiceofaperioperativepatientmonitor

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Overview

§ Marketshares(perioperativemonitors)§ Highcombinedmarketshares§ Stablemarketsharesofthemergingparties§ Lowermarketsharesofcompetitors

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Actual competition

§ Here,tenderingproceduresdonotfundamentallyaffectthevalueofmarketsharesasastrongindicationsofthemergedentity’smarketpower.§ Valueofeachcontractwonislowandthenumberoftendersis

high§ Customizationisrestricted,thespecificationofthetender

alreadydeterminewhetheragivensupplierwillsubmitabidornot

§ CustomersappeartobewillingtoswitchincaseofSSNIP

§ Marketsharesreflectrealpurchasingdecisionsbycustomersinagivenhear,henceareinformativeofmarketpower

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Closeness ofcompetition

§ Suppliersselectauctionsinwhichtheyparticipateanddonotbidwhentheybelievetheyhavenochanceofwinning.

§ Themorefrequentlytwofirmsfaceeachother,themorelikelyitisthattheirpricesaresubstitutes.§ in3,355tenders,themergingpartiesencounteredeachotherin[50-60]%§ Facednocompetitorin[20-30]%§ Asinglecompetitorin[20-30]%§ Whenfacingothercompetitors,in[30-40]%ofthe cases,themergingpartiesfaced

neitherSiemensnorPhilipsbutonly variousfringeplayers

§ Themergermayresultinareductionofthenumberofsignificantplayersfromtwotooneinonetenderoutofthree.

§ WhenbothInstrumentarium&GEarepresent,Philipsbidslower(strongercompetition!)

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Closeness ofcompetition

§ Runner-upanalysis:§ SupposeGE&Instrumentarium areclosecompetitors,onewouldexpecttoseeGEasthesecond-placedbidderforalargenumberofthosebidswonbyInstrumentarium andvice-versa

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Other analyses

§ Theaveragediscountofferedwhenbothnotifyingpartiesarepresentishigher(lowerprices)§ (Econometricmodellingtoassesstheimpact)

§ Fringeplayerandpotentialcompetition§ Repeatrunner-upanalysistoassessthestrengthofcompetition

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Other risks

§ Barrierstoentryandexpansion§ Importanceofinnovationasaparameterofcompetition(mergingpartieswerethemostinnovativesuppliers)

§ Importanceofdistributionnetwork(tooffersupportoverthewholelifecycle)

§ Lackofcountervailingbuyerpower§ Inpurchasingdecisions:“PerformanceandQualityarethemostimportantcriteriafollowedbyServiceandProductdurability.Priceisobviouslylessimportant”.

§ Fragmentedcustomerbase(limitedvalueoftendersàlowerpricesensitivity)

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Case#2:AngloAmericanPLC/LafargeS.A


AngloAmericanPLC/LafargeS.A

§ Horizontal jointventurebetweenAngloandLafargeintheproductionofcement aggregates,asphalt andready-mixconcrete(RMX)

§ Theory ofharm:Coordinatedeffects inthemarkets forthesupply ofbulkcement inUK

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Competitiveassessment

Mergerwithcoordinatedeffectsinthemarketforbulkcement§ Themoreanindustryisalreadycharacterisedbythe

coexistenceoffactorswhichfavouracollusiveoutcome,themoreriskytoallowamerger

whichkindofevidencehasbeencollected?§ Threeconditionsneedtobesatisfiedforcollusiontobe

possible§ Coordinationhastobecontinuous?Pricehastobe

monopolistic?

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Competitiveassessment:firstcondition

o Ability:(Pre– merger)o Highconcentration(4UK

producers)o Limitedcapacityexpansion

(onlyTarmac)o Structurallinkso Homogeneousproducto Similarcoststructureo Priceannouncementletters

o Ability:(Postmerger)o Fourtothreecement

producers(fivetofourRMXsuppliers)

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Competitiveassessment:firstcondition

o Monitoring(Pre– merger)o Highdegreeoftransparency

ontotalproductionofcement,capacityandcompanies’ownmarketshares(how?Wasitsufficientknowingitsownmarketshare?)

o Monitoring(Post–Merger)o Increasedmarketinformation

(verticalintegrationplayedarole,why?)

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Competitiveassessment:secondcondition

Internalsustainability(pre-merger)

o Highcapitalinvestmentandriskofaggressivecompetition

o Highcross– sales:repatriationofcementvolumesassignallingorpunishmentmechanism

o Lafargewaslimitedinrepatriationbecauseitwasnotalargecementbuyer

Internalsustainability(postmerger)

o JV,largeproducer,strongerincentivetocoordinate

o Greaterflexibilityandoptionsofpunishmentbyincreasingsimilaritiesinverticalintegration

o Greateruseofrepatriationassignal

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Competitiveassessment:thirdcondition

Externalsustainability(pre-merger)

o Competitivefringeo Nothreatfromimportso Highbarriertoentryo Nobuyerpowero Firmswithnoincentivefor

coordination:TarmacBUT..

Externalsustainability(post–merger)

o ByremovingTarmac,thatwaspartofthecompetitivefringeandhadastrongincentivetoexpanditsoutput,theJVwouldincreasetheexternalsustainability

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Conclusions

TheCCconcludedthattheproposed JVwouldmakecoordinationinthebulkcementmarketsignificantlymorelikelytoemerge (iftherewerenopre-existingcoordination)oriftherewerepre-existingcoordinationwouldincreasemateriallyitseffectivenessandstability

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Case#3:TomTom/TeleAtlas


TomTom/Tele Atlas§ TomTom’s acquisitionofsolecontrolofTeleAtlas:verticalmergerinthe

industryofportablenavigationdevices(PND).

§ Upstreammarket (TeleAtlasandNavteq mainly)Productmarket:navigabledigitalmapdatabasesGeographicmarket:worldwide

§ Intermediatemarket (TomTom andGarmin)Productmarket:navigationsoftwareGeographicmarket:EEA,butworldwideinscope

§ DownstreammarketProductmarket:portablenavigationdevices,i.e.PNDs.Geographicmarkets:nationalinscope

§ Keytopic:foreclosure49


Somequestions

§ Whatwastheconcernofcompetitors?§ Whichhypothesesofinputforeclosurehavebeen

explored?§ HowdidtheCommissionassess:

§ whetherthemergedentitywouldhavetheability post-merger toforecloseaccesstoinputs;

§ whetheritwouldhaveincentives todoso;§ whetheraforeclosurestrategywouldhaveasignificantdetrimentaleffect

inthedownstreamPNDmarket?

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Assessment – ability topost-mergerforeclose?

§ Hypothesestoexplore:§ byincreasingprices§ byprovidingdegradedmaps

ordelayedupdates

§ Indicatorstoassess§ marketpower§ importanceoftheinput

(map)forthedownstreamproduct(PND)

§ possiblecounter-strategies

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Marketshares

Allportableend-users PNDs

TomTom [30-40] [30-50]

MioTech& Navman [10-20] [10-20]

Garmin [10-20] [10-20]

MEDION [0-10] [0-10]

MyGuide [0-5] [0-5]

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Assessment – ability toforeclose post-merger

§ Marketpower:TeleAtlassellsmapdatabasesabovemarginalcostandhasamarketshareofmorethan50%intheupstreammarket,NAVTEQbeingtheonlyotherproviderofnavigabledigitalmapdatabaseswithasimilarcoverageandqualitylevel

§ Importanceofinput:mapsareacriticalcomponentforPND§ Possibleforeclosingstrategy:mayberaisingprices(thehypothesis

of“gaming”withmapformatsappearsunlikely)§ Lackofeffectivecounterstrategies,because:

- Entryunlikelytobetimely- LongtermcontractsbetweenTeleAtlasandGarmin(and,toalesserextent,others)wouldpreventtheformerfromforeclosingaccesstoinput.However,Garminrepresentsonly20%ofthemarket.

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Assessment – incentivetoforeclose post-merger

§ Supposetheverticallyintegratedentitystopssellingitsmapdatabasestodownstreamcompetitors.Whatisthelikelyeffectonitsprofits?§ Checkprofitsbothupstreamanddownstream!

§ Lossesupstream§ Profitsdownstream(?)

§ Neteffect?§ Theextenttowhichdownstreamdemandislikelytobedivertedawayfromforeclosedrivals;and

§ Theshareofthatdiverteddemandthatcanbecapturedbythedownstreamdivisionoftheintegratedfirm

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Assessment – incentivetoforeclose post-merger

§ Thecostoftheinput(map)hasaverylowweightonthecostofPND.Eveninpassontocustomersishigh,thechangeincostwoulddetermineonlyasmallincreaseinsalesforthemergedentity.

§ EvidencethatsomePNDsupplierswouldbereluctanttopassoncostincreases

§ Garminisprotectedfrompriceincreasesandthiswouldfurtherreducethediversionfromcompetitorstomergedentity

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Assessment – effects onthedownstreammarket

§ Nodetrimentaleffects

§ Likelyefficiencies(mergerspecific)§ Internalizationofdoublemarkup§ Volumediscountsarecommonintheindustry,butaretoolimitedtosubstantiallyeliminatedoublemark-upà henceefficienciesaremergerspecific

§ Otherefficiencies:alignedincentivestodevelopbettermaps,faster

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Conclusion

§ “Themergedentitylackstheincentivetostopsupplyingmapdatabases toitsdownstreamcompetitors.Inaddition,anyforeclosurestrategytoincreasepricesordegradequalityforTomTom’s competitorswouldnothaveasignificantanticompetitiveeffect inthedownstreamPNDandnavigationsoftwaremarkets.Thisconclusiondoesnotrelyonlikelyefficienciesresultingfromtheproposed operation.However,theconclusionisstrengthenedfurtheronceefficienciesaretakenintoaccount”

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