ICN Mergers Working Group Coordinated Effects. Adrian Proctor Economic Adviser, Mergers, OFT

Transcription

1 ICN Mergers Working Group Coordinated Effects Adrian Proctor Economic Adviser, Mergers, OFT 1

2 Structure of the presentation Introduction Potential Focal points for Coordination Risk factors for all focal points. Coordination with Price targets Coordination with Geographic targets Coordination with Customer targets Conclusion References 2

3 Introduction Coordination agreement (tacit or explicit) to reduce competition. Unilateral effects - one firm taking the external reactions as given. In coordination you may check your understanding with competitors or try to influence your competitors understanding of your likely reactions to their increased competition. Mergers can change individual incentives (unilateral effects) and separately enable agreement (or enforcement of agreement). Mergers can change incentives of several individual firms (multilateral effects) without there being an agreement. There have been very few cases where the OFT or Competition Commission have concluded on coordination. 3

4 Introduction continued Coordination does not have to achieve a specific (e.g. price) goal but just to reduce competition. Firms have a range of information on the market e.g. trade publications, meetings, recruitment, or social. Information other than future pricing can be used to reduce competition. Evidence that coordination has not occurred on one focal point does not show those firms have not coordinated elsewhere. Merger analysis can consider different potential coordination to see if the merger makes any sufficiently more likely, to meet the legal thresholds. Firms have access to a wide range of strategies some of which could amount to coordination. All coordination attempts to reduce competition and so raise firms prices or profits. The rules for monitoring and punishing firms can be based on different focal points apart from price and have different transparency and symmetry requirements.

5 Focal points for Detection/Punishment in Coordination Price/output (customer harm explicit in agreement) Geographic - supply requires physical presence, high transport costs or small local markets mean firms do not tend to serve certain routes or areas. Customer - certain customers are significant enough that a tacit understanding can arise amongst suppliers. For this understanding to happen separately for each tender may require explicit agreement/communication. Product/Customer type. Theoretically possible (can be transparent) but difficult to agree on or punish e.g. capacity or differentiation decisions are usually irreversible and costly or difficult to punish. Not discussed further.

6 Risk factors for all Coordination For all potential focal points it is still the case that: Previous coordination makes coordination more likely. If entry is easy (low sunk costs) or buyers have strong external options, in the coordinated market segment then coordination will fail. (External stability) Concentration makes coordination easier, a merger to duopoly in particular will increase transparency (for given demand or customers). Innovation or demand shocks to the coordinated segment make tacit agreement harder (unstable incentives). Agreement can be more difficult to establish tacitly than explicitly so may require more (subtle) communication.

7 Price Coordination (Punish if price falls) Transparency requires homogenous products (or stable differentiation) to ensure limited (non price) incentive for buyers to switch. Firms know others prices or can determine them from market data (e.g. output). Punish by lowering price which affects whole market, not just firm that deviated (all firms may help punish a deviation). Degree of punishment can depend on the degree of deviation to try to maintain some level of coordination (price above competitive level). Symmetry/Maverick Coordination often depends on firms having similar costs or market shares/capacity so all benefit equally. Maverick may have other incentives for low pricing (e.g. downstream operations or innovative product).

8 Geographic Coordination (Punish if enter) Focal point formation requires firms to know which areas are reserved by competitors and will be defended with retaliation. Allocation could be historic and more stable/observable than a (collusive) price level so easier to establish tacitly. The more complex the geographic split the more communication may be required. Physical presence (geographic location) in an area is usually transparent. Firms that deviate (enter a reserved area) can be identified so punishment can be targeted to them by counter entry on their profitable routes/areas. Remaining firms can continue to coordinate unaffected. Symmetry/Maverick- Involvement in communication. Difficult to punish (low sunk cost). New entrants to an area may only be able to grow slowly and incur higher sunk costs for expansion so may prefer to coordinate.

9 Geographic Coordination Buses Competition Commission Bus market study, found evidence of possible coordination in the NorthEast. After privatisation many local areas had operators with a strong presence, competition should have encouraged cross entry on routes. Entry onto routes has lower sunk cost if have a local depot or network. Two firms with nearby depots may have had more than 20 contacts per year to help understand rivals likely responses to entry on certain routes (but did not discuss prices or costs). Established core territory/routes (mostly historic), understood by some competitors. Firms retaliated against significant entry either on the same route or that operators core routes elsewhere.

10 Customer Coordination (Punish if take customer) Focal point requires long term customers. Often know which firm won customer (especially if single sourcing). Can be limited to larger customers if they cannot self supply/import. Single sourcing raises transparency so coordination can affect more of the market. Either punish on the same customer, or on other customers of the competitor that deviated (their installed base). Response contained to competitor (and maybe region) where deviation occurred. Limited capacity needed and wider market not affected so coordination continues. Symmetry/Maverick Multi-sourcing or sole supplier business model, communication. Long-term contracts create more benefit from each customer gained (deviation) but can also limit the growth a maverick achieves before being punished.

11 Customer based Detection/Punishment - Cement OFT merger: UK JV Lafarge/AngloAmerican(Tarmac) (ongoing at CC), covers aggregates, concrete etc. Parties two of four vertically integrated UK cement producers (used in ready mix concrete, blocks, and tiles). Long term customers. Complaints of refusal to supply and parallel pricing (price letters). Large customers (e.g. ready mix) cannot use imports. Merger makes Tarmac s incentives more symmetric. Alleged coordination to gain increases on some prices. Deviation detected if too many customers won given industry pattern and chatter. Limited ready mix switching (events may be punishment or demand adjustment) Punishment could be targeted (tit-for-tat) to minimise cost and maximise impact, deviation would be piecemeal so capacity does not need to be split evenly.

12 Conclusion Although all coordination aims to increase prices, any (tacit) agreement does not have to include a target price for the whole market. The transparency required for coordination and how targeted or effective punishment can be, will depend on the focal point assumed. Some markets where tacit coordination is suspected have used frequent communication to establish geographic or customer based focal points. 12

13 References CC/OFT, Merger Assessment Guidelines, September CC Local Bus Services, Addendum to provisional findings on geographic market segregation and operator conduct OFT, Decision proposed joint venture between Anglo American plc and Lafarge S.A. (ME/5007/11) OFT, Conjectural Variations and Competition Policy: Theory and Empirical Techniques