RBB Economics
TOULOUSE, NOVEMBER 2007
ANDREA LOFARO
Svitzer/Adsteam:
Assessing unilateral effects when
monopolists merge
Association of Competition Economics (ACE) Conference
RBB Economics
ANDREA LOFARO
Overview
1. Potential competition concern
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TOULOUSE, NOVEMBER 2007
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2. Analysis of potential entry
3. What’s the relevant price benchmark?
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ANDREA LOFARO
1.
•
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TOULOUSE, NOVEMBER 2007
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•
Potential competition concern
Harbour towage companies operating at different ports do not
constrain each other
–
Apart from Liverpool, merger did not involve any structural change
–
Concern was whether Svitzer represented the most likely potential
entrant into Adsteam ports (and vice versa)
Profitability of parties’ ports was generally either low or negative
–
Threat of entry represented an effective competitive constraint
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ANDREA LOFARO
2.1
Analysis of Potential Entry
•
High fixed costs imply that any entry strategy can only be viable
if a sufficient number of customers can be secured
•
This could be achieved
– by displacing the incumbent entirely; or
– by cherry-picking certain customers
•
We analysed the costs of the incumbent and (low-cost) potential
entrants for each port
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TOULOUSE, NOVEMBER 2007
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Average Cost Curves at Different Levels of Operation
2,500
Average costs, Average price
(GBP)
ANDREA LOFARO
2.2
2,000
1,500
1,000
500
2 tugs
3 tugs
250
500
4 tugs
5 tugs
6 tugs
0
750
1,000
Tug Jobs per Year
Svitzer AC
low cost AC
current operation
average price
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ANDREA LOFARO
2.3
Entry by displacing strategy
•
Non-unionised entrant would face significantly lower costs
than Svitzer (Adsteam)
•
Cost structure of Svitzer (Adsteam) can be used as a proxy for
likely costs that Adsteam would face if it decided to enter (and
vice-versa)
•
Operators without current UK operations are at least as likely
(if not more likely) entrants into each Svitzer (Adsteam) port
than Adsteam (Svitzer)
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TOULOUSE, NOVEMBER 2007
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ANDREA LOFARO
2.4
•
TOULOUSE, NOVEMBER 2007
Strategy might be less costly than previous one as it would
require an investment in a smaller number of tugs
–
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Entry by “cherry-picking” strategy
E.g. an investment in only 3 tugs could be viable if enough
customers do not require more than 3 tugs for each job
•
Analysis shows that minimum number of tugs (and tug jobs) a
(low-cost) entrant would require to break even was generally
below the size of the parties’ operations
•
Cherry-picking strategy would be viable for a non-unionised
entrant but not for a unionised company, such as Svitzer or
Adsteam
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8
Cherry Picking – Customers ranked by Revenue
2,500
2,000
Average price
(GBP)
ANDREA LOFARO
2.5
ACE Conference
TOULOUSE, NOVEMBER 2007
1,500
1,000
500
1
2
3
4
0
250
500
750
1,000
Tug Jobs per Year
Large customers
business up to 3 tugs
business requiring more than 3 tugs
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ACE Conference
TOULOUSE, NOVEMBER 2007
9
Cherry Picking – Break-Even for Low-Cost Entrant
2,500
Average costs, Average price
(GBP)
ANDREA LOFARO
2.6
2,000
1,500
1,000
500
1
2
3
4
0
250
500
750
1,000
Tug Jobs per Year
Large customers
business up to 3 tugs
low cost AC
business requiring more than 3 tugs
average price
RBB Economics
ACE Conference
TOULOUSE, NOVEMBER 2007
10
Cherry Picking – Effect on Incumbent’s Profits
2,500
Average costs, Average price
(GBP)
ANDREA LOFARO
2.7
2,000
1,500
1,000
cherry picking effect
500
0
250
500
750
1,000
Tug Jobs per Year
Svitzer AC with 5 tugs
Incumbent’s post-entry operation
Svitzer AC with fewer tugs
Incumbent’s pre-entry operation
Price
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ANDREA LOFARO
2.8
•
Analysis of Potential Entry – Conclusions
Neither Svitzer nor Adsteam enjoy a unique cost advantage
over other potential entrants
–
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TOULOUSE, NOVEMBER 2007
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•
Merger would not reduce the constraint to which each UK
“monopoly” port was subject
Should entry occur in those ports for which a cherry picking
strategy is viable, Svitzer’s AUC would increase significantly
–
Threat of losing even a small portion of business likely to provide
an effective constraint on incumbents’ behaviour
–
Consistent with evidence on low profitability of harbour towage
services in UK ports due to threat of entry
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ANDREA LOFARO
3.1
What’s the relevant price benchmark?
•
Some disagreement with CC over the price benchmark that was
relevant for assessing viability of entry
•
CC considered that after entry, increased competition would
drive prices to 10% below their current levels
•
CC concluded that an operator considering entry would be
unlikely to enter UNLESS it could profitably do so at prices 10%
below their current levels
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ANDREA LOFARO
3.2
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What’s the relevant price benchmark?
•
In general, a firm deciding whether to enter will be influenced by
post-entry prices (not by current prices)
•
In some cases, current price provides good proxy for likely postentry price
•
In other cases, post-entry price may be substantially below the
prevailing price (e.g. textbook case of Bertrand competition)
–
Incumbent may continue to set high prices without attracting entry
–
Threat of entry cannot be considered to constrain pre-entry prices
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3.3
•
However CC identified potential entry as THE factor that
constrained current prices
– consistent with evidence on low profitability
•
For the new entity to remain constrained it is required that:
TOULOUSE, NOVEMBER 2007
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What’s the relevant price benchmark?
•
–
customers would be able to sponsor entry (CC’s questionnaire
confirmed this) by guaranteeing their business at current prices
–
rival operators would be able to profitably supply at current prices
Unreasonable to expect parties to demonstrate that entry would
have been attractive at prices 10% lower than current levels
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ANDREA LOFARO
3.4
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TOULOUSE, NOVEMBER 2007
For example, any attempt by Svitzer to raise prices from €100
to €110 would be unprofitable provided that
–
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What’s the relevant price benchmark?
–
some customers could respond by guaranteeing their business at
a price of 100 to a rival
Rival would be able profitably to supply those customers at 100
•
Entrant would not need to offer a significant discount over premerger prices
•
Entrant would not need to be concerned about the effects of a
possible post-entry price war
•
CC’s requirement to assess whether entry would be attractive
at a price of €90 was inappropriate