M.4734 Ineos/Kerling. A story of an empirical exercise. Comments by Miguel De La Mano and Andrea Amelio

Transcription

1 M.4734 Ineos/Kerling A story of an empirical exercise Comments by Miguel De La Mano and Andrea Amelio

2 Background of the case In June 2007, the acquisition of Kerling's polymer business by Ineos was notified to the Commission. In January 2008, the Commission cleared the takeover unconditionally. The parties' activities overlap with respect to a number of products, in particular the production and sale of S-PVC. Kerling is the largest supplier (40%) in the UK market not far from being twice as big as Ineos in 2006 (25%). Importers account for 35% in 2006 of UK total S-PVC demand.

3 The key issue Will the European exporters be followers or exercise a competitive constraint on the merged entity? Data processed by the CET and collected with the help of the parties were an essential piece of evidence to inform the decision.

4 Parties exercise The parties provided correlation and stationarity analysis in its response to the 6.1.c Decision The analysis found: high price correlation between UK and Continental Europe prices for both Ineos and Kerling stable relationship (stationarity) between UK and Continental Europe prices for both Ineos and Kerling However correlation and stationarity cannot be considered conclusive: Inability to identify direction of the causality Not a SSNIP test.

5 Gathering data process: dealing with accountancy data The CET asked the Parties data on all S-PVC sales (but also exwork sales, weighted price, discounts, transport costs, packaging costs, commercial costs, margins associated to each sale) The dataset has monthly observation for time frame by client type and sale type. Problems: time inconsistencies that accountancy data might contain due to e.g. returns of goods in different month of the original order, rebates recorded on a yearly or quarterly basis, cash discounts granted on different month of the original transaction or subsequent accountancy adjustments To complete the dataset, the CET collected information of relevant variables for the S-PVC market to perform the residual demand estimation.

6 The perfect case for a critical loss analysis The CET undertook a critical loss analysis (two step analysis): Calculation of the critical loss. The Critical Loss is the amount of sales that the merged entity in the relevant antitrust market would have to lose before a given unilateral price increase would become unprofitable. Estimation of the actual loss The actual loss is the amount of sales that the merged entity in the relevant antitrust market loses in the event of a unilateral price increase. It is thus necessary to estimate the elasticity of the merged entity residual demand. See Baker and Bresnahan (1985) If the actual loss will be larger than the critical loss, the price increase will be unprofitable

7 The critical loss computation Two ways of computing the critical loss: PMCL q (t) Linear Isoelastic (B)reak(E)ven (C)ritical (L)oss (Profit) (M)aximization (C)ritical (L)oss Hp 1 Hp 2 5% % % % BECL q (t) Using two margins hypothesis 5% 10% Hp Hp

8 The actual loss computation COEFFICIENT Dataset Including Returns IV IV* OLS Ineos Price Ineos Price Ineos Price Dataset Excluding Returns IV IV* OLS Ineos Price Ineos Price Ineos Price Ineos Quantity Kerling Quantity Electricity Price Day Ahead * Gas Price Day Ahead *** *** UK Plastic Demand Index (DH252) Ethylene Price Western Europe *** *** ** *** Trend December Dummy Outages Dummy *** *** Constant Observations R-squared Standard errors in parentheses *** p<0.01, ** p<0.05, * p< * Larger set of instruments

9 Conclusions on the estimation the coefficient on the inverse elasticity of demand was in practically all tested specifications statistically nonsignificant, values not robust to slight modifications in the specification and it was often of the wrong sign standard statistical tests show that the instruments used were too weak Kerling s costs or common ethylene costs were in general driving the price of Ineos in all specifications

10 ..but simpler analysis is also useful Importers are not a fragmented fringe. Throughout the period at least 2 importers have held significant market shares close or above 10%, despite the fact that they do not produce S-PPV in the UK. % Quantity (t) In the first half of 2006 Kerling has gain shares to European exporter. In the second half Kerling lost sales to another European exporter Period Arkema LVM Vinnolit Aiscondel Ineos Cires Solvin Shin Etsu Kerling

11 A natural experiment The assessment of an unplanned outage on Ineos plants in mid 2004 suggests that both Kerling and Importers are in a position to swiftly react to any attempts of Ineos to constraint output so as to increase prices Mkt Shares Quantity (t) Period Ineos Kerling Importers Ineos yearly mkt share Kerling yearly mkt share Importers yearly mkt share Period Ineos Importers Kerling

12 Conclusions perfect case for an econometric exercise. CET was essential complement to the case team good cooperation with parties in order to construct the dataset and correct accountancy limitations data can provide valuable and essential piece of evidence both with simple and complex exercise