APPLICATION OF TIME SERIES TECHNIQUES IN RELEVANT MARKET DELIMITATION. Simone M. Cuiabano, Joao Carlos Moraes and Lucas Pinho.

Transcription

1 APPLICATION OF TIME SERIES TECHNIQUES IN RELEVANT MARKET DELIMITATION Simone M. Cuiabano, Joao Carlos Moraes and Lucas Pinho Cres

2 Introduction Relevant market definition: a key question for merger analysis? Recent debate in Brazil related to big mergers in the plastic industry. The Brazilian New Antitrust Law /11 Art 88, 5 The concentration acts involving elimination of competition in a substantial portion of the relevant market, which could create or strengthen a dominant position or that can result in the domination of the relevant market of goods or services shall be prohibited, except: If there is an increase of productivity or of competitiveness; If it improves the quality of goods or services; If they encourage efficiency; If a relevant part of the resulting benefits are transferred to consumers.

3 Time Series Sofisticated econometrics methodology, consolidated in macroeconomics => needs further explanation to policy practicioners. Concepts: Stochastic processes Random walk Stationarity Univariate and multivariate models.

4 Time Series Stationary TS techniques Simple and parcial correlation Auto-regressive vectors (VAR)) Time Series Non-stationary TS techniques Engle-Granger Johansen Cointegration Test VECM

5 Case 1. Braskem-Quattor Industry of thermoplastic resins: polyethylene (PEAD, PEBD, PEBDL) and polypropylene (PP). Braskem: the largest petrochemical company in the Americas with the merger. Geographic relevant market to include imports (international) or just domestic production?

6 Case 1. Braskem-Quattor Time Series Argued the existence of a long-run relationship between domestic and international prices Johansen cointegration, VECM, Granger Causality. International prices caused home prices. Merger would have little impact on prices due to market internationalization. SSNIP test First GMM estimations got demand elasticies around 1%. Then concluded that elasticities changed over time, ranging from -2% to -4%, higher than the critical loss (-1.85/-2.68).

7 Case 1. Braskem-Quattor DEE/Cade Identified inconsistencies in the Granger causality and in the variance decomposition: VAR in first difference without structural break X VEC with structural break => did not verified causality of foreign to domestic price. Little explanation for the variance decomposition since cost prices (i.e. naphtha) anticipated both movements in foreign and domestic prices. Cade decision: behavioral remedies - Agreed with the thesis for international geographic market. - New company has to send monthly reports on imported quantity and on importing contracts (5 years).

8 Case 2. Braskem-Solvay Searching for regional market consolidation Solvay located both in Brazil and Argentina; Would create a monopoly in Mercosur; Market of PVC (PVC-S and PVC-E).

9 Case 2. Braskem-Solvay Parties Tests for price cointegration in the PVC market. Trace statistics for the null hypothesis of noncointegration => long run relationship between domestic and international prices VEC equation for both relationships and, as their estimated adjustment coefficients were negative, they corroborated their analysis for a long run and stable cointegration between domestic and foreign prices

10 Case 2. Braskem-Solvay DEE review s strike again Controlling prices by common factors, unit root tests were not I(1) => series should be interpreted as stationary. Using a simply correlation analysis, the strongest relation was found between domestic and US-Gulf price, contradicting the impulse response results. This hypothesis was corroborated by the VAR model and the Granger causality test.

11 Case 2. Braskem-Solvay DEE/Cade SSNIP test: elasticities -0,5 to -0,8, lower than the critical elasticity Table 13 - Critical elasticities Cmg - Proxy Cmg(estimated) Linear Isoelastic Linear Isoelastic SSNIP 5% 10% 5% 10% 5% 10% 5% 10% Breakeven Profit Max

12 Case 2. Braskem-Solvay DEE/Cade Diff-diff estimations: Considering plants interruptions, estimated coefficients for South American and North American imports were positive and significant. Stocks and anti-dumping measures distorted the results of econometric evaluations. Companies dropped the case and no merger was concluded. In 2016, Unipar Carbocloro, the country s main caustic soda producer acquired Solvay Indulpa, creating the 2 nd largest producer of PVC behind Braskem.

13 Case 3. Videolar-Innova Videolar: polystyrene (PS) producer in the north of Brazil. Innova: stated owned enterprise in the south producer of PS and commercialized acrylonitrilebutadiene-styrene (ABS), styrene acrylonitrile (SAN) and styrene through imports. Monopoly in the PS market

14 Case 3. Videolar-Innova Parties International relevant market and ABSxPS substitution. Correlation and Cointegration pointed for a long run relationship between prices of PS. Plus, long run relationship between ABS/PP prices. DEE/Cade Replicated the cointegration test using Johansen. Different conclusion: PSBRA would cointegrate with PSUSA, PSEUR and PSASI, but not for ABS and PPASIA. VEC model for variables in differences since they were not stationary result

15 Case 3. Videolar-Innova Hypothetical Monopolist Test Claimants elasticity of demand = 1.08% DEE estimation = from % to % Critical loss: 1.73 to 3.69 Cade decision: behavioral remedies - Newco has to keep the same level of production in north and south plants; - Agreed on styrene and polystyrene patents licensing; - Adoption of a compliance program; - Agreed on not acquiring any further resin plan for the next 5 years.

16 Final Considerations It is clear the need for a detailed assessment of the assumptions used in the models. Supremacy of the results obtained by TMH in comparison with those from cointegration tests. Often results from these methods assume determinants of the co-movement of prices as primarily from consumer behavior, ignoring other factors such as cost shocks. Use it with caution!

17 Thank you!