UNILATERAL EFFECTS, BOX OF NEW TOOLS AND CANS OF (OLD?) FOOD: THE SIMMENTHAL/MANZOTIN CASE

Transcription

1 1 UNILATERAL EFFECTS, BOX OF NEW TOOLS AND CANS OF (OLD?) FOOD: THE SIMMENTHAL/MANZOTIN CASE Andrea Pezzoli Chief Economist Italian Competition Authority Lear Conference, 27 June 2013 Rome

2 Content of the presentation New tools in merger analysis are increasingly being used by the ICA 2 mergers in the last 12 months assessed also on the basis on methods other than market shares, HHI and so forth The SIMMENTHAL/MANZOTIN case Our experience so far with the new tools Some open issues 2

3 3 The new tools are not so new Sai/Fondiaria (2004) (conditional clearance): price pressure analysis quite important for the decision; structural elements were not self evident (market shares slightly higher than 40%...) Numico/Mellin (2005) (conditional clearance): collective dominance; price pressure analysis quite important for assessing competitive constraints in baby-food markets Alitalia/Volare (2006) (conditional clearance): diversion ratios played a significant role in considering Linate as a distinct relevant market In other cases price pressure analysis played an important role (in back office assessments) in phase I (full clearance of mergers in the glue markets and in the diary markets) or in phase II in the assessment of the remedies (milk industry)

4 4 The recent experience and the increasing use of new tools In the last 12 months quite a number of mergers were assessed in Phase II: Italgas-Acegas-Aps/Isontina Reti Gas (prohibition) Bolton Alimentari/Simmenthal (conditional clearance) Bolton Group International/Luis Calvo Sanz (full clearance) Compagnia Italiana di Navigazione/Tirrenia (conditional clearance) CAI/Wind Jet (conditional clearance)

5 The recent experience and the increasing use of new tools 5 In 2 cases (Bolton Alimentari/Simmenthal and Bolton Group International/Luis Calvo Sanz) price pressure analysis was used In Bolton Alimentari/Simmenthal (canned meat) the new tools were used only in Phase II In Bolton Group International/Luis Calvo Sanz (canned tuna) the diversion ratios were used as a screening device in Phase I Both the mergers concerned consumers goods industries (it s quite relevant for the availability of data )

6 6 The Simmenthal/Manzotin case The parties Kraft Foods Europe is a multinational (and multiproduct firms) and owner of the Simmenthal brand (the leading brand for canned meat in Italy) Bolton is the most important producer of branded canned food and owner of the best known brands (Mantozin, Rio Mare, Alco, Palmera) The merger adds yet another brand (Simmenthal) to Bolton s portofolio

7 The Simmenthal / Manzotin brands 7

8 8 Market shares: canned meat Market shares (all) - volume (%) Market shares (all) sales (%) COMPANY COMPANY BOLTON ALIM BOLTON ALIM KRAFT KRAFT POST MERGER POST MERGER INALCA INALCA Oct-20 PL PL CELEBRITY <1 <1 <1 CELEBRITY <1 <1 <1 STAR <1 <1 <1 STAR <1 <1 <1 TULIP <1 <1 <1 TULIP <1 <1 <1 Market shares (supermarkets) - volume (%) Market shares (supermarkets) sales (%) COMPANY COMPANY KRAFT KRAFT BOLTON BOLTON POST MERGER POST MERGER INALCA INALCA PL (PLT) PL (PLT) CELEBRITY <1 <1 <1 CELEBRITY <1 <1 <1 STAR <1 <1 <1 STAR <1 <1 <1 TULIP <1 <1 <1 TULIP <1 <1 <1

9 9 The aim of quantitative analysis In this particular case, market shares (70-80%) were considered sufficient to go to Phase II High market shares do not necessarily mean that the merging parties may be able to increase prices (post merger); this may be especially the case if products are differentiated Analysis aimed at understanding to what extent one of the merging parties constrained the other s pricing (and viceversa), i.e. are they close competitors? How close?

10 10 The empirical model Standard LA-AIDS framework (only level 3 of the Hausman (2004) beer paper) Only 4 brands of canned meat Possible restrictive patterns critique Controls included for stockpiling due to (price and non price) promotions Full set of monthly and year dummies to control for seasonality as well as other shocks

11 11 The data Model estimated on monthly data (running from Sept to August 2012) on sales and volumes of canned meat by brand Standard canned meat (93% of the total meat) sold through supermarkets (73% of standard meat) Focus on actual average prices (as opposed to list prices)

12 The estimation results: 3SLS IV estimation 12 Manzotin Simmenthal log(price Manzotin) (-8.55) (4.34) log(price Montana) (-1.10) (1.89) log(price Simmenthal) (7.80) (-3.90) log(price Private Label) (2.11) (-2.16) log(real expenditure) (-2.89) (1.01) Number of observations R-squared Chi-square (p-value) 0 0 Monthly dummies Yes Yes Yearly dummies Yes Yes Serial correlation test (Durbin h) 0.55 (p-value 0.66) 0.71 (p-value 0.57)

13 13 The key elasticities & diversion ratios Manzotin s own price elasticity Cross price elasticity Manzotin/ Simmenthal Simmenthal s own price elasticity Cross price elasticity Simmenthal/ Manzotin (0) 2.43 (0) (0) 0.35 (0) Note: elasticities statistically different from zero at conventional values (p-values in parenthesis) Diversion ratio from Simmenthal to Manzotin = 33% Diversion ratio from Manzotin to Simmenthal = 60%

14 14 The IPR formula Formula for asymmetric diversion ratios contained in Hausman et al. (2011) Marginal costs recovered from info on (relatively stable) margins recovered during the proceeding & observed prices Price effects underestimated because of 1) linear demands and 2) no feedback effects from merging and non merging parties

15 15 The results Diversion ratio from Simmenthal to Manzotin (%) Diversion ratio from Manzotin to Simmenthal (%) Producer s margin (%) GUPPI Simmenthal (%) 5,3 6,6 7,9 GUPPI Manzotin (%) 15, ,8 IPR Simmenthal (%) 5,3 6,7 8,0 IPR Manzotin (%) 14,1 17,7 21,2 Average (market) price increase (%) 6,2 7,7 9,3

16 16 The conclusion of the case Merger conditionally approved, making binding the commitments proposed by the parties up-front buyer solution, i.e. commitment to suspend the implementation and the closing of the proposed merger Process near completion AS do MAR, which is a very successful player in the canned food sector, seems the likeliest buyer

17 Our experience so far with the new tools The merger Manzotin/Simmenthal was quite clearcut. Most of the problems which generally arise with the use of the so called new tools could easily be solved: We could save the new tools for Phase II: market shares were so high not to require anything else to screen the merger The restrictive patterns critique could be easily avoided: just few and differentiated brands we had not to deal with the design of the nests or dimensionality issues The merging parties were evidently close competitors: diversion ratios were self evident and well above standard thresholds

18 Our experience so far with the new tools We had no choice in selecting the demand form: asymmetric IPR formulas only available for linear demand IPR s were quite high (6-9% at the market level, 14-21% for Manzotin!!): quantitative results were neither grey nor conflicting with qualitative data Even the remedy seems to be proportionate, appropriate and we hope effective!!

19 Our experience so far with the new tools New tools strike a good balance in the assessment of mergers with differentiated products. In these cases the relevant market approach may be misleading (but don t forget that New tools require the same ingredients used for proper market definition ) New tools are best used as a complement to traditional analysis (market shares, brand loyalty, relative weakness of private labels, countervailing power ) Lower thresholds can be used in Phase I to screen mergers that should go to Phase II (higher probability of type-ii error, but that can be further assessed (and dealt with) in Phase II, as in Bolton Group International/Luis Calvo Sanz, the canned tuna merger )

20 Some open issues (1) Use of UPP, GUPPI, Diversion Ratios Just to screen mergers or can be used to measure unilateral effects? Time matters Not immediate how to deal with the so-called grey area arising from different functional forms and thresholds (see next slide) What thresholds? And demand form? In our case (the asymmetric case), IPR formulas only available for linear demands (lower bounds) What is the appropriate threshold when efficiencies are incorporated? How should be dealt with conflicting evidence (i.e. high concentration and IPRs)?

21 Some open issues (2) Pricing pressure indicators vs. merger simulation Full fledged simulation seems the most comprehensive approach Can deal with different functional forms, efficiency, product repositioning, feedback effects with non merging parties, etc. But It is very time consuming (even though ) The results are often not robust and can be easily challenged More difficult to play in Court ( new tools may be too easy for economists but are still new and complicated for judges )

22 Gross Margin How to deal with the grey area? 60% 50% 40% 30% 20%? 5% Isoelastic IPR 10% Isoelastic IPR 5% GUPPI 5% Linear IPR Problematic Merger 10% Unproblematic Merger 0% 0% 10% 20% 30% 40% 50% 60% Diversion Ratio Reproduced from OFT s presentation 22