Vertical mergers - EWS/Marcroft
NEIL PRATT
ACE conference, November 2007
© Frontier Economics Ltd, London.
Agenda
1. Framework for assessing input foreclosure
2. Comments on EWS/Marcroft
Vertical merger analysis – preliminaries
 No direct loss of rivalry
 Efficiency rationales
• Elimination of double marginalisation
• Improved investment incentives
 Two main unilateral theories of harm
• Input foreclosure: restrict/degrade input supply
• Customer foreclosure: limit input purchases
The input foreclosure mechanism
Upstream
entity
RRC?
Efficiencies?
Downstream
entity
Downstream
rivals
Softer competition?
Impact on customers?
Analytical framework
Ability
•
•
•
Significance of input to downstream firms
VI firm’s market power upstream
Barriers to entry and expansion upstream
Incentive
•
•
•
•
Margins in upstream and downstream markets
VI firm’s share of downstream market
Extent of share-shifting to VI firm
Impact on size of downstream market
Effect
•
•
•
•
Competitive significance of foreclosed rivals
Impact on barriers to entry
Competitive constraint from vertically integrated rivals
Merger-specific efficiencies
Empirical analysis of incentive
 ‘Vertical arithmetic’ approach can be used to
assess profitability of input foreclosure – e.g.
• Evraz/Highveld
• Thales/Finmeccanica/Alcatel Alenia Space & Telespazio
 Simple analysis can indicate likelihood of
foreclosure
• Estimate cost from foregone upstream margin based on
loss of input sales
• Estimate profit from additional downstream margin based
on expected sales diversion
 More sophisticated simulation approach can help
assess competitive effects
EWS/Marcroft - background
 Relatively low value deal in a difficult
market
 Some tricky economic issues to resolve
 No economic advisers retained by parties
 Apparently limited data available to CC in
certain areas
 Conflicting evidence from EWS and
complainants
Vertical foreclosure: main lines of debate
 Efficiencies did not play a significant role
• EWS already vertically integrated
• Parties did not make strong efficiency claims
 Debate focused on two key issues:
• Marcroft’s pre-merger position in the wagon
maintenance market
• EWS’s incentive to lower foreclose rivals in the
haulage market
Marcroft’s pre-merger position
 CC relied on structural analysis of wagon
maintenance market
• High share – 56% (volume)
• Only one rival with national coverage
• Self-supply not an effective constraint
 Some conflicting evidence on performance and
conduct
• Poor financial performance of Marcroft
• Examples of failed attempts to increase prices/lost tenders
 CC concluded on balance that Marcroft had
significant market power
Two possible forms of input foreclosure
 Reduction in service quality to haulage
companies
• Increased downtime, less reliable scheduling of works
• Could be targeted at selected customers
• Foreclosed customers would face higher costs, or lose
contracts
 Increase in price of maintenance services
• Conflicting evidence on significance of maintenance
relative to operating costs
• Price increase expected to have some negative impact on
rivals
Limited evidence on incentive and effect
 Data limitations appear to have precluded
application of vertical arithmetic
• CC points to size of haulage market compared to
maintenance market and EWS’s high share
• Wabtec (and others) not seen as competitive
alternative
 High-level approach to haulage market
• No concrete examples of potential foreclosure
 Not much on harm to end users
Final remarks
 EWS/Marcroft follows orthodox approach
to vertical mergers
 Debate focused on empirical questions
• Market power of Marcroft
• Profitability and effect of foreclosure
• Threat of self-supply by e.g. Freightliner
 Data appears to have been quite limited
and contentious in this case
Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies based in Europe (Brussels, Cologne and
London) and Australia (Melbourne & Sydney). The companies are independently owned, and legal commitments entered into by any one company do not impose any
obligations on other companies in the network. All views expressed in this document are the views of Frontier Economics Limited.
FRONTIER ECONOMICS EUROPE
BRUSSELS | COLOGNE | LONDON
Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA
Tel. +44 (0)20 7031 7000 Fax. +44 (0)20 7031 7001 www.frontier-economics.com