Sasol Fertilizer. An alternative explanation. ACE Conference Bergen, Norway

Transcription

1 Sasol Fertilizer An alternative explanation ACE Conference Bergen, Norway 1

2 Overview of the industry structure AECI Omnia Sasol Yara Profert Production: 1 Ammonia X 2 ANS X X X 3a Explosives X X X 3b LAN X X Distribution: 4a LAN X X X X 4b Imported Urea X X X X 2

3 Two theories to explain the same behaviour Fact: Sasol charged Profert more for wholesale supplies of LAN than it charged Yara SA Competition Commission s explanation: Raising Profert s costs protected Yara s profit margin at the distribution level and thereby increased Yara s willingness to pay for LAN at the wholesale level Alternative explanation: Sasol s pricing structure was non-exclusionary price discrimination reflecting exogenous differences between Yara and Profert 3

4 Model set-up Simplified industry structure: Assume Sasol is the sole producer of LAN; ignore that it is vertically integrated into distribution Ignore Omnia and AECI altogether Yara and Profert are undifferentiated Cournot competitors in the retail distribution of LAN Yara and Profert also import, and are undifferentiated Cournot competitors in the retail distribution of, urea an imperfect substitute for LAN Assume that the retail demands for LAN and urea are linear Yara is part of Yara International, a producer of urea, and can obtain imported urea at lower marginal cost than Profert Profert is more efficient in distribution, i.e. it has lower marginal costs at the distribution level 4

5 2-stage game Yara and Profert maximise profits in the retail sale of LAN and urea subject to: Their marginal costs of distribution Their marginal costs of procuring LAN and imported urea Consumer demands for LAN and urea Cournot competition Sasol picks the prices of LAN to Yara and Profert that maximise its profits 5

6 Incentive to price discriminate Sasol has an incentive to price discriminate in the wholesale supply of LAN in favour of Yara because: Yara has better access to imported urea (better by-pass option) Profert is more efficient (Sasol extracts through higher wholesale prices) 6

7 What if Sasol were required to set uniform prices? Effect on: Effect Comment LAN wholesale prices LAN shares Urea shares Price to Profert decreases but price to Yara increases Profert s share increases (and Yara s decreases) Profert s share decreases (and Yara s increases) With a greater share of LAN sales, Profert has less incentive to expand sales of urea (because expanding sales of urea reduces LAN prices, and the negative effect of this price reduction on Profert s LAN revenues is now greater); reverse for Yara Total supplies of LAN and urea No effect (and hence no effect on the LAN and urea prices paid by farmers) By-product of linear demands 7

8 Comparison with existing literature on price discrimination in input markets Yoshida (2000) Valletti (2003) Katz (1987) Inderst & Valletti (2009) Upstream Downstream Comment Unconstrained monopolist Upstream supplier faces threat of by-pass (but downstream firms have to incur fixed cost to by-pass) Downstream firms have different marginal costs Katz: one of the downstream firms (chain store) is active in more markets; I&V: downstream firms potentially have different marginal costs (based on investment) More efficient downstream firms pay higher input prices Input price that triggers investment in by-pass is lower for larger downstream firms (size difference is by assumption in Katz and due to marginal cost difference in I&V), hence they end up paying lower input prices Akgun, Moresi & Stillman (2008) Upstream supplier faces competition from a second product Downstream firms have different marginal costs of distribution and different marginal costs of procuring substitute product By-pass option does not require investment this breaks the link seen in Katz and I&V between downstream scale and the effectiveness of the bypass option 8

9 Existing literature De Graba, P., Input Market Price Discrimination and the Choice of Technology, 80 American Economic Review (1990) Katz, M., The Welfare Effects of Third-Degree Price Discrimination in Intermediate Good Markets, 77 American Economic Review (1987) Inderst, R. & T. Valletti, Price Discrimination in Input Markets, 40 RAND Journal of Economics 1-19 (2009) Valletti, T., Input Price Discrimination with Downstream Cournot Competitors, 21 International Journal of Industrial Organization (2003) Yoshida, Y., Third-Degree Price Discrimination in Input Markets: Output and Welfare, 90 American Economic Review (2000) 9

10 London Tel +44 (0) Fax +44 (0) Bishopsgate London EC2M 3XD United Kingdom Brussels Tel +32 (0) Avenue Louise Brussels B-1050 Belgium Paris Tel +33 (0) Avenue de l Opéra Paris France rstillman@crai.com 10