De ning the Geographic Market in the Mondi - Dunapack Merger Case Comments

Transcription

1 De ning the Geographic Market in the Mondi - Dunapack Merger Case Comments Gabor Kezdi CEU ACE 2008, Budapest Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 1 / 11

2 The Problem A merger case Mondi wanted to buy the industrial paper bag production business of Dunapack ndustrial paper bags are rather homogenous products ndustrial paper bags may constitute a market of their own substituting other bags for paper bags seems problematic existence of a separate paper bag market cannot be rejected Geographic market de nition is decisive in the case merger would create near monopoly on the Hungarian industrial paper bag market Mondi is large in EU (around 40 per cent of sales) Dunapack is very small outside Hungary (less than 5 per cent of EU sales) combined share in EU would not increase signi cantly Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 2 / 11

3 Textbook Approach: The SSNP Test Hypothetical monopolist or SSNP test thought experiment: assume entire market controlled by a monopoly question is whether a small but signi cant, non-transitory price increase (5% for 12 months) would be pro table for that monopoly How to carry out the test de ne a candidate market for a start estimate own-price elasticity of demand (ε) for the market at competitive prices market is not larger if inelastic demand (ε < 1) need to do some more work if elastic demand (ε 1), need to estimate marginal costs see whether d (TR TC ) /dp 7 0 "estimate own-price elasticity" sounds like a technical detail to be lled in by econometricians turns out to be very di cult in many cases usually not because of econometric technicalities Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 3 / 11

4 Textbook Approach: Demand Estimation Estimating own-price elasticity needs data prices on entire market de ning a market price may not be that straightforward quantities on entire market n appropriate quantity precise estimates require many observations n appropriate quality prices and quantities should be measured in reasonably precise way need exogenous variation in prices or valid instruments for supply ("cost-shifters") Data requirements for demand estimation are very demanding rarely satis ed in competition cases Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 4 / 11

5 What f Data s Not Good Enough Academic answers what would you tell to your student if she were to use such data for her dissertation? maybe it is time to think about another topic? what would you do if you nd the data you were going to use for a research project are not good enough? maybe should back out and work on other topics? Those are not good answers in real-life competition policy cases What then? search for other evidence keep the spirit of the SSNP test de ne a candidate market see whether a hypothetical monopolist could make pro t from a SSNP Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 5 / 11

6 What Other Evidence? ive examples estimate transportation costs relative to product price low costs from large distance are necessary but not su cient for market to be wider analyze import - export data signi cant international trading activity is su cient but not necessary for market to be wider look at natural experiments speci c case studies instead of statistical analysis ask competitors about capacity utilization and hypothetical scenarios ask clients about trading partners and hypothetical scenarios Try to put a consistent picture together from the often fragmented evidence Mondi - Dunapack case is a nice example all ve types of evidence are utilized Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 6 / 11

7 Natural Experiments A good natural experiment 1 changes supply conditions 2 without in uencing demand conditions in direct ways Plant outages uncontroversial identi cation neos - Kerling merger case (E.Commission) OMV - MOL pre-merger analysis Exchange rate movements more controversial identi cation 1 pricing strategy of multinational rms may be unrelated to short-run uctuations in exchange rates Mondi is an international rm 2 direct in uence on demand conditions cannot be ruled out especially in case of derived demand for intermediate inputs industrial paper bags are such inputs Same logic as behind V in demand estimation Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 7 / 11

8 Questionnaire Evidence The only way to get at hypothetical scenarios what would you do if...? Good questionnaire evidence is 1 from a representative sample 2 based credible answers Evidence can be used in multiple ways estimate own-price elasticity of demand and go on with SSNP test or merger simulation get a more qualitative picture of competitive pressure Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 8 / 11

9 Good Questionnaire Evidence 1. Sample selection Sample needs to be representative need all parties or a random sample sampling frame and procedure must be appropriate non-response needs to be low or random Mondi-Dunapack customer questionnaire sampling frame: large buyers may bias estimates of competitive pressure question is direction of bias if larger customers switch harder, competitive pressure may be underestimated, working against narrow market de nition Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 9 / 11

10 Good Questionnaire Evidence 2. Credibility of answers Why and when should we trust survey answers? survey answers are results of human behavior incentives matter costs of giving credible answers depends on di culty of question ask about situations that respondents understand easily bene ts of giving credible answers are very low may be negative if respondent feels potential bene ts in distorting answers in general it is easier to give an honest answer than lie that s why surveys work in case of easy questions with no negative incentives But cognitive biases may be important (b/c low incentives) home bias may be behind controversial survey evidence in the neos-kerling case Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 10 / 11

11 Conclusions De ning geographic markets can be di cult because estimating demand elasticities is di cult Many independent sources of information may be necessary Natural experiments may provide useful case studies plant outages are uncontroversial but rare exchange rate movements are more controversial Questionnaire evidence can be useful sampling and nonresponse are important in representative nature credibility of answers can be increased by careful questionnaire design A consistent picture needs to be put together from fragmented evidence one or two pieces may not t if so, we better understand why Gabor Kezdi (CEU) Mondi-Dunapack. Comments ACE 2008, Budapest 11 / 11