ICN Merger Working Group teleseminar
15 November 2011
Unilateral Effects in Differentiated
Product Markets
Szabolcs Lőrincz*
Chief Economist Team, DG Competition
European Commission
*The views expressed are those of the speaker and do not necessarily reflect those of DG Competition or the
European Commission.
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DG Competition
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Outline
• The economics of unilateral effects
• How to assess unilateral effects
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DG Competition
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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
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DG Competition
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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
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Does it pay to increase prices?
Price
Demand
?
Marginal cost
Leaving
customers
Quantity
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DG Competition
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What if customers left for another product that you also own?
Price
Demand
?
Marginal cost
Leaving
customers
Quantity
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DG Competition
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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)
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DG Competition
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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.
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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
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DG Competition
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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
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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
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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
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DG Competition
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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
http://ec.europa.eu/competition/consultations/2010_best_practices/best_practice_submissions.pdf
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DG Competition
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Commonly employed empirical
methods include:
I.
II.
III.
IV.
Descriptive data analysis
Measures of substitutability
Direct estimation of competitive constraints
Merger simulations
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I. Descriptive data analysis
• Descriptive analysis of industry data
– Retail scanner data (e.g. Pernod/Ricard, Kraft/Cadbury, M. 5046
Friesland/Campina, M. 5658 Unilever/Sara Lee Body Care)
– Consumer panel data (e.g 5658 Unilever/Sara Lee Body Care)
– Import/export databases (e.g . M. 5907 Votorantim/Fischer) …
• Descriptive analysis of company data
– Transaction-level data (e.g. M. 5046 Friesland/Campina, M. 4747
IBM/Telelogic)
– Bidding data (e.g. M. 5421 Panasonic/Sanyo)
– Descriptive event analysis (e.g. M. 5335 Lufthansa/SN Holding) …
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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. 4439 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
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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
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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. 5421 Panasonic/Sanyo, M. 5669
Cisco/Tandberg
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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. 5644
Kraft Foods/Cadbury, M. 5658 Unilever/Sara Lee Body Care
• Sensitivity analysis!
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Merger simulation:
the general scheme
1. Demand
2. Supply
3. Equilibrium
Consumer heterogeneity
Product differentiation
Oligopoly – Bertrand
•
•
Demand estimation
Merger simulation
Substitution?
Price effects?
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Merger simulation
Examples from recent consumer goods cases
• Chocolates: M. 5644 Kraft Foods/Cadbury
• Nested logit demand (one-level)
– By economic advisor of the Parties
• Predicted price effects moderate/low
• Deodorants: M. 5658 Unilever/Sara Lee Body Care
• Nested logit demand (one- and two-level)
– By the Commission
• Predicted price effects significant in several countries
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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”
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DG Competition
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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.
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DG Competition
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Example: Friesland Foods/Campina
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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?
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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
YES
NO
Countervailing buyer
power
NO
--
Entry
NO
YES
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DG Competition
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