Unilateral Effects in Differentiated Product Markets

Transcription

1 ICN Merger Working Group teleseminar 15 November 2011 Unilateral Effects in Differentiated Product Markets Szabolcs Lőrincz* Chief Economist Team, European Commission *The views expressed are those of the speaker and do not necessarily reflect those of or the European Commission. 1

2 Outline The economics of unilateral effects How to assess unilateral effects 2

3 Possible anti-competitive effects Two ways in which horizontal mergers may significantly impede effective competition: Non-coordinated (= unilateral) effects : a merger may diminish the degree of competition by eliminating important competitive constraints on one or more firms, which consequently would have increased market power, even without resorting to co-ordination Co-ordinated effects: a merger may create or reinforce a situation where competition is reduced by coordination 3

4 Unilateral effects Hypothetical example Suppose Coca Cola merges with Pepsi Pre-merger, if Coca increases prices, it will lose some of its sales to Pepsi Post-merger, the merged entity will recuperate the profit on the additional sales of Pepsi Incentive to increase prices will depend on: how close other competitors are competitors reaction (repositioning, entry, ) customers reaction (retailer buyer power, ) consumers reaction (price sensitivity, ) possible efficiencies 4

5 Does it pay to increase prices? Price Demand? Marginal cost Leaving customers Quantity 5

6 What if customers left for another product that you also own? Price Demand? Marginal cost Leaving customers Quantity 6

7 An important distinction Bertrand competition: Firms set prices and customers then decide whether and how much to buy Branded consumer goods Cournot competition: Firms set capacities and customers then decide the price level Capacity-driven industries (ex. primary goods markets, fresh dairy-products, paper production, printing) 7

8 Tentative conclusions (1) The merged entity may have an incentive to raise prices unilaterally after the merger if: The merged entity gets a significantly higher market share the change in HHI is a good indicator of how big this effect will be. In particular for homogeneous products The merger brings together close substitutes The diversion ratio between two products captures how much of the sales that is diverted from one is captured by the other. 8

9 Tentative conclusions (2) Market wide effect depends also on competitors reactions: Competitors will usually respond by increasing both output and prices If competitors cannot increase capacity, then price increases are likely to be big Remaining competition/elastic demand may keep prices low 9

10 The role of market shares Do unilateral effects have anything to do with whether or not the new entity will be the largest player in the market? Not necessarily, but there is a correlation. High market share gives incentive to compete less aggressive The larger the market share of the merged entity, the larger fraction of customers in the market will be directly affected. Small market shares of competitors may indicate that they exercise only a limited competitive constraint The legal guidance: Merger Regulation Recital 32: Below 25% likely to be compatible with the common market 10

11 Methods of assessment How do we find out how likely a merger is to have a significant impact? Much of the analysis is qualitative: see EC Horizontal Merger Guidelines (market share analysis, products offered by the parties, capacity constraints, entry barriers, buyer power, etc.). Information to be obtained from merging parties, customers, competitors, trade press, Depending on the case, more detailed empirical analysis may also be possible 11

12 Methods of assessment (cont d) Often key question for assessment of merger impact: to what extent are market shares a reflection of market power? (do they overstate or understate market power?) E.g. Differentiated products: Important element is how much lost sales the merging parties pick up from each other in case of a price rise 12

13 Best Practices for the submission of economic evidence and data collection Scope and purpose Assessing economic analysis The relevant question Data Methodology Results and implications Robustness Data request Dos and don t s 13

14 Commonly employed empirical methods include: I. Descriptive data analysis II. Measures of substitutability III. Direct estimation of competitive constraints IV. Merger simulations 14

15 I. Descriptive data analysis Descriptive analysis of industry data Retail scanner data (e.g. Pernod/Ricard, Kraft/Cadbury, M Friesland/Campina, M Unilever/Sara Lee Body Care) Consumer panel data (e.g 5658 Unilever/Sara Lee Body Care) Import/export databases (e.g. M Votorantim/Fischer) Descriptive analysis of company data Transaction-level data (e.g. M Friesland/Campina, M IBM/Telelogic) Bidding data (e.g. M Panasonic/Sanyo) Descriptive event analysis (e.g. M Lufthansa/SN Holding) 15

16 II. Measures of substitutability If good data on quantities and prices (and other relevant factors) are available, it may be possible to estimate elasticities (demand system estimation) Examples: M.3796 Omya/Huber, M.5046 Friesland/Campina, M.5114 Pernod Ricard/V&S Approximation: evidence on customer switching Do we have information about some incident where the price of the products of one market participant went up while the prices of other products were held constant. What happened? Can we get a good idea of where the customers went? Survey evidence Examples: M Ryanair/Aer Lingus, M.4919 Statoil/ConocoPhillips, M.5335 Lufthansa/SN Holding (Brussels Airlines) => Combined with margin data, this can give an indication of the pricing pressure ( UPP, etc.) created by the merger (data reliability is key for the weight to attribute to such measures). Empirical market definition methods are also relevant: Examples: M.4513 Arjowiggins/M-Real Zanders Reflex, M.5153 Arsenal/DSP, M.5190 Nordic Capital/Convatech 16

17 III. Direct estimation of competitive constraints: Econometric analysis Cross-section analysis: Price-concentration analysis: are there differences in prices in geographic areas where both 1 and 2 are present when compared to areas where only one is present? Example: M.4919 Statoil/ConocoPhillips Time-series analysis: Entry event: are there examples of entry of, say, company 1 into geographic areas where company 2 was already present? Did the price of 2 change (significantly)? Example: M.4439 Ryanair/AerLingus Natural experiments are of particular interest: Unexpected plant closure: what impact does it have on prices? How are imports affected? Examples: M.3625 Blackstone/Acetex, M.4734 Ineos/Kerling 17

18 Direct estimation of competitive constraints: Bidding analysis In bidding markets useful information can be found from tender offers (bidding analysis): Do the merging parties systematically participate in the same tenders (and refrain from participating in the same tenders)? When one of the merging parties wins a contract, does the other often come high (perhaps even second) in the ranking? Cross section analysis (see above): are there differences in the prices offered in those tenders where both 1 and 2 are present when compared to tenders where only one is present? Examples: M.3083 GE/Instrumentarium, M.3216 Oracle/PeopleSoft, M.4647 AEE/Lentjes, M.4662 Syniverse/BSG, M.5232 WPP/TNS, M Panasonic/Sanyo, M Cisco/Tandberg 18

19 IV. Merger simulation On the basis of reasonable assumptions on the nature of competition in the market (a suitable model describing the nature of competition in the market), try to predict the likely impact on prices following a merger. Examples: M.1672 Volvo/Scania, M.3191 Philip Morris/Papastratos, M.4985 BHP Billiton/Rio Tinto, M Kraft Foods/Cadbury, M Unilever/Sara Lee Body Care Sensitivity analysis! 19

20 Merger simulation: the general scheme 1. Demand Consumer heterogeneity 2. Supply Product differentiation 3. Equilibrium Oligopoly Bertrand Substitution? Demand estimation Price effects? Merger simulation 20 20

21 Merger simulation Examples from recent consumer goods cases Chocolates: M Kraft Foods/Cadbury Nested logit demand (one-level) By economic advisor of the Parties Predicted price effects moderate/low Deodorants: M Unilever/Sara Lee Body Care Nested logit demand (one- and two-level) By the Commission Predicted price effects significant in several countries 21

22 Some remarks on econometrics Econometric analysis should be seen as complementary evidence to the qualitative analysis In many cases, qualitative information is the most readily available information, and is deemed sufficient to resolve the concerns being addressed. Econometric exercises are always based on a theory according to which a cause-effect relation is established and on certain economic and statistical assumptions Practical requirements for econometric analysis: 1. Availability of a good quantity of reliable data 2. A certain amount of time - Early involvement of economists 3. Consult Best practices for the submission of economic evidence and data collection 22

23 Example: Friesland Foods/Campina Campina and Friesland Foods are the two largest dairy cooperatives in the Netherlands (2007: Campina 6,885 farmers, Friesland Foods 9,417 farmers). Both collect raw milk and process it into consumer and industrial dairy products. Full legal merger leading to the establishment of a single cooperative. 23

24 Example: Friesland Foods/Campina 24

25 Example: Friesland Foods/Campina Focus now on two products: Fresh Milk Organic Fresh Dairy Products Starting point: high market shares 69.1% fresh milk 70% organic fresh Conclusion: different SIEC for fresh milk No concerns for organic fresh Why? 25

26 Example: Friesland Foods/Campina Fresh Milk Organic Dairy Close competitors YES -- Limited possibilities to switch suppliers YES NO Unlikely to increase supply if prices increases Countervailing buyer power YES NO NO -- Entry NO YES 26