ABA Brownbag Series Market Definition

Transcription

1 ABA Brownbag Series Market Definition Patrick DeGraba U.S. Federal Trade Commission* December 14, 2015 *The views expressed in this presentation are my own and do not necessarily represent those of the Federal Trade Commission or any individual Commissioner. 1

2 Outline What is Market Definition? Why Do Market Definition? Product Market Definition: Hypothetical Monopolist Test Targeted Customers Geographic Market Definition Market Definition in Some Cases 2

3 What is Market Definition? Ultimate goal of merger analysis is competitive effects. Will market power be created and exercised? Useful to identify products that are close substitutes for the product under analysis. What are the products that are likely to constrain the pricing of the product under consideration? Market Definition is an over inclusive first approximation of close substitutes. 3

4 What is Market Definition? Terrible Use of the English Language There is no actual market. How can you define something that does not exist? We would be better served with a term such as substitutes triage or likely competing products delineation. Back of the envelope competitive effects. 4

5 Why Do Market Definition? To calculate HHI or other concentration measures one needs an aggregate market number. Best with commodities and high concentration or low concentration Concentration only a first cut of likely harm in close cases Might be useful to determine what are important competing products. Might help organize an investigation May need a structural case if competitive effects measures are not available Judges seem to insist on it. Slight exception in Evanston 5

6 Pitfalls of Market Definition Merger guidelines- [competitive effects] analysis need not start with market definition. Competitive effects can be calculated without reference to market definition Evanston Whole Foods-Wild Oats Once a competitor is in the market, temptation to treat all competitors equally Arch Coal Perplexing threshold market definition can block useful competitive analysis. Lundbeck 6

7 How to do Market Definition Intuitively - Find all the products to which lots of customers might switch if the prices of the products under investigation increase There are two dimensions Product Market based entirely on customer willingness to substitute among products with different attributes Geographic Market Based either on customer location or supplier location 7

8 The Hypothetical Monopolist Test Product Market The Hypothetical Monopolist Test uses an iterative process to define a market Begin with a product sold by each of the merging firms as a candidate market. Ask if a hypothetical monopolist that controlled this product could profitably impose a small but significant and nontransitory increase in price (SSNIP) above the benchmark (often prevailing) level. If yes, stop. This product is a market If no, go to the next step Expand candidate market by adding the product to which the most sales divert, and return to the SSNIP question 8

9 The Hypothetical Monopolist Test Product Market Illustrated Product A is a tentative product market Raising product A s price by a SSNIP is unprofitable because of substitution to products B and some substitution to C Now consider A and B as the tentative market Raise A and B s price by a SSNIP Substitution to C (and others) does not make the price increase unprofitable Then, A & B comprise a relevant product market 1 2 A C A C B B Consumer substitution to B defeats price increase. Insifficient consumer substitution to C to defeat price increase. A and B comprise a market. 9

10 SSNIP test is over inclusive When the price of product A increases the price of substitutes will typically increase as well. This increase in price makes the substitutes less of a competitive constraint than it would be if its price remained unchanged. The SSNIP test keeps the price of substitutes unchanged. Thus SSNIP overstates the competitive constraint a substitute will impose if its price is allowed to adjust. 10

11 Critical Loss and Market Definition A price increase implies sales of some units will be lost remaining units will be sold at a higher price The SSNIP test just asks, Are the increased profits on the remaining sales more than the lost profits from the lost units? The number of lost units that allows a hypothetical monopolist to just break even from a SSNIP is called the Critical Loss. 11

12 Critical Loss and Market Definition Critical Loss (CL) is the number of lost units such that the lost profit from those lost sales just equals the increase in profits from the remaining sales %CL = %Δp M + %Δp Where M = p - mc p Derivation Increase in profits = Δp(q Δq) Lost profits = (p mc)δq CL = Δq such that the Added Profit just equals the Lost Profit Δp(q Δq) = (p mc)δq qδp CL = Δq* = p + Δp - mc 12

13 Critical Loss and Market Definition The Predicted Loss (also called the Actual Loss ) is defined as the number of lost unit sales that the hypothetical monopolist is predicted to lose due to the price increase. The price increase is predicted to raise the hypothetical monopolist s profits if the Predicted Loss is less than the Critical Loss. In that case, the product in question comprises a product market. A key issue, then, is how to reliably estimate the Predicted Loss. 13

14 Critical Loss and Market Definition Predicted Loss estimates are based on data that allow us to estimate diversion among products or price effects. Nestle/Dreyer s (2003) super premium ice cream Looked at retail data and observe entry by Dreyer s resulted in lower prices of other super premium ice cream. Could calculate diversion between super-premium and premium ice cream base on retail data. Sysco (2015) broadline food services looked at bidding data and inferred the next best alternative to one of the merging parties would be if that party raised it prices by a SSNIP (FTC v Sysco; M&O at 36 ) 14

15 Critical Loss and Market Definition SSNIP analysis by itself is rarely dispositive. Courts will also check such results are consistent with other evidence of market definition. Data may not always be available to perform a SSNIP test. 1. Interviews with market participants 1. Buyers 2. Sellers 2. Depositions (investigational hearings) 3. Documents Business and Marketing Plans Sales reports Internal and third-party industry studies discussions of pricing and competition 15

16 How Should We Interpret High Margins? High margins mean the Critical Loss will be small: Remember: CL = %Δp M + %Δp But high margins also suggest that price elasticity is low, which means predicted loss is low. Remember: M = 1/E own While not dispositive this creates an inherent tension from a claim of low critical loss but high predicted loss. 16

17 Market Definition if Mergers Prevents Price Reduction Nascent or potential competition theories limit competitively important products to those whose prices could fall in the future Appropriate benchmark price is price that would have prevailed but for the merger, not current price Example Verisk EagleView merger EagleView dominant provider aerial rooftop photos Their likely price constrained by measurement by hand Verisk nascent entry would have lowered photo price Measurement by hand would have no competitive impact, so it should not be in the market (see, Economics at the FTC, RIO, Oct 2015, section 4.3, ) 17

18 Targeted Customers Product Market Definition Products sold to an identifiable group of customers can be a separate market if: Seller can charge that group of customer a different price than other customers No arbitrage between this group and other groups Analysis of targeted customers very close to competitive effects analysis. Recent examples: Sysco Broadline food service to national customers Whole Foods Core customers 18

19 Geographic Market Could be of competitive importance if customers purchase products in a limited geographic area. Pinnacle/Ameristar Local markets St Louis and Lake Charles Exclude Las Vegas. Evanston Northwestern Health Determine which hospitals near merging hospitals are good substitutes SSNIP test can be applied to geography just like products. Start with merging location and raise the price. If SSNIP not profitable adding closet competitor (all else equal) and try again. SSNIP approach replacing Elzinga-Hogarty 19

20 Geographic Market Targeted customers. If national firms can discriminate by location, each location could potentially by a separate market. Things to consider If price is national but promotions are local, each locality could be a market If non-price attributes like service quality are chosen on a local basis If two national competitors have different local competition in different cities FCC uses local geographic markets for mobile service (AT&T-T-Mobile staff report para ) Local casinos might offer promotions by zip code. In many cases geographic component adds nothing Airline Markets product defined as city pairs What more geography does one need? Arch Coal ~10 mines and all of the electricity producer that used that coal were identified. What help is geography? 20

21 FTC v Sysco (2015) Merger between two largest and only national broadline food service providers in the U.S. FTC asserted a market for targeted broadline foodservice distribution to national customers. Customers with large geographic presence would not switch their purchases to a patchwork of smaller service in Response to a SSNIP Economic expert performed a SSNIP test Based on margin calculations determined critical loss to be 50% Calculated predicted loss to be much lower than 50% (FTC v Sysco M&O 35-37) Looked at bidding and RFP data to determine how customers would divert to another bradliner if the price of one broadliner were to increase by 5%. Looked at Linc database maintained by U.S. Foods services and found much less than 50% of customers would switch to non-broadline services in response to a SSNIP. Two conditions for targeted customers Ability to price discriminate No arbitrage 21

22 FTC v Sysco (2015) Two conditions for targeted customers Ability of sellers to price discriminate No arbitrage Judge found FTC expert analysis persuasive Had reservations because data was not from ordinary course documents but rather assembled for the proceeding and were not necessarily complete Found it important that results of the data analysis were consistent with ordinary course documents and business practices the determination of the relevant market in the end is 'a matter of business reality-[ ] of how the market is perceived by those who strive for profit in it 22

23 FTC v Whole Foods (2007) Merger between Whole Foods and Wild Oats Two largest organic grocery chains Market Definition FTC - Premium Natural Organic Stores (PNOS) Defendants - Premium Natural Organic Stores Trader Joe s, Conventional Supermarkets, Gourmet Stores, Club Stores. District Judge - Because there are marginal customers that would switch to other stores there was not PNOS market. The larger market unlikely to have antitrust harm Circuit Court Viewed this case as a targeted customer case. 23

24 FTC v Whole Foods (2007) Court found competition between PNOS stores and other supermarkets for dry goods no such competition for perishable goods between PNOS Competition between Whole Foods and Wild Oats (and other PNOS) did affect prices of perishable goods Core PNOS customers bought primarily perishable goods Thus they could be price discriminated against Thus the cluster of goods they purchased constituted a submarket. 24

25 FTC v Whole Foods (2007) Diversions Ratios : Based on analysis of Wild Oats Revenues Other PNOS PNOS Whole Foods PNOS Trader Joe's Vitamin Cottage Conventional Sup. Gourmet Sup. Mass Merchants 25

26 FTC v Whole Foods (2007) Wild Oat s Response to Entry Whole Foods Other PNOS Trader Joe's Gourmet Sup. Conventional Sup. Mass Merchants Margins Implied Prices 26

27 Evanston Northwestern Healthcare (2005) FTC brought suit against a consummated merger of hospitals in Evanston Illinois FTC alleged a small geographic market consisting of 3 hospitals two of which had merged Defendants claimed a larger market including more hospitals FTC presented direct evidence of price increases as a result of the merger. 3 Interesting findings by Judge McGuire Elzinga-Hogarty not appropriate for hospital geographic market because it returned overly large geographic markets The geographic market contained 7 hospital even though the plaintiffs proposed a three hospital market The direct evidence of anticompetitive effects were enough to overcome the larger market. 27

28 FTC v Lundbeck (2009) perplexing market definition precluded any competitive effects analysis Lundbeck purchased Indocin IV with retail price of $78. Treats PDA in preterm babies. Purchased the only other drug to treat PDA, NeoProfen, about to receive FDA approval. Two days later raised the price of Indocin IV to ~$1500. After FDA approval, Lundbeck priced NeoProfen similarly. Eight doctors testified, would not switch for small price difference. Defendant s expert said a hospital that would prefer lower priced drug could not steer doctors towards cheaper drug. 28

29 FTC v Lundbeck (2009) District Court Judge concluded Doctors would not switch, implies low cross price elasticity Low cross price elasticity implies not in same market Not the same market implies no antitrust harm Low cross elasticity by itself DOES NOT imply not in same market. Must be compared to own price elasticity. Competitive Effects (symmetric linear case) %ΔP = MD 2(1-D) Where M = p - mc p and D = ε ji ε ii Casual analysis of a 5% price change may not help analyze a 1300% price change. 29

30 Takeaways Market definition is best viewed as an over inclusive first approximation of the important competing products. Based on customer substitution to other goods. SSNIP test results should be consistent with other evidence. Can be useful When structural analysis is appropriate. As a way to organize an investigation. Pitfalls of use Not a prerequisite for doing competitive effects and can divert attention from the competitive analysis. Potential for all sellers in the market to be treated as equals when they are not. Targeted customers useful in focusing on competitive effects. 30