De…ning the Geographic Market in the
Mondi - Dunapack Merger Case
Comments
Gabor Kezdi
CEU
ACE 2008, Budapest
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
1 / 11
The Problem
A merger case
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Mondi wanted to buy the industrial paper bag production business of
Dunapack
Industrial paper bags are rather homogenous products
Industrial paper bags may constitute a market of their own
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substituting other bags for paper bags seems problematic
existence of a separate paper bag market cannot be rejected
Geographic market de…nition is decisive in the case
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merger would create near monopoly on the Hungarian industrial paper
bag market
Mondi is large in EU (around 40 per cent of sales)
Dunapack is very small outside Hungary (less than 5 per cent of EU
sales)
combined share in EU would not increase signi…cantly
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
2 / 11
Textbook Approach: The SSNIP Test
Hypothetical monopolist or SSNIP test
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thought experiment: assume entire market controlled by a monopoly
question is whether a small but signi…cant, non-transitory price increase
(5% for 12 months) would be pro…table for that monopoly
How to carry out the test
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de…ne a candidate market for a start
estimate own-price elasticity of demand (ε) for the market
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at competitive prices
market is not larger if inelastic demand (ε < 1)
need to do some more work if elastic demand (ε
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1),
need to estimate marginal costs
see whether d (TR TC ) /dp 7 0
"estimate own-price elasticity"
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sounds like a technical detail to be …lled in by econometricians
turns out to be very di¢ cult in many cases
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usually not because of econometric technicalities
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
3 / 11
Textbook Approach: Demand Estimation
Estimating own-price elasticity needs data
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prices on entire market
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de…ning a market price may not be that straightforward
quantities on entire market
In appropriate quantity
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precise estimates require many observations
In appropriate quality
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prices and quantities should be measured in reasonably precise way
need exogenous variation in prices
or valid instruments for supply ("cost-shifters")
Data requirements for demand estimation are very demanding
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rarely satis…ed in competition cases
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
4 / 11
What If Data Is Not Good Enough
Academic answers
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what would you tell to your student if she were to use such data for her
dissertation?
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maybe it is time to think about another topic?
what would you do if you …nd the data you were going to use for a
research project are not good enough?
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maybe I should back out and work on other topics?
Those are not good answers in real-life competition policy cases
What then?
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search for other evidence
keep the spirit of the SSNIP test
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de…ne a candidate market
see whether a hypothetical monopolist could make pro…t from a SSNIP
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
5 / 11
What Other Evidence?
Five examples
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estimate transportation costs relative to product price
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analyze import - export data
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speci…c case studies instead of statistical analysis
ask competitors
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signi…cant international trading activity is su¢ cient but not necessary
for market to be wider
look at natural experiments
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low costs from large distance are necessary but not su¢ cient for market
to be wider
about capacity utilization and hypothetical scenarios
ask clients
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about trading partners and hypothetical scenarios
Try to put a consistent picture together from the often fragmented
evidence
Mondi - Dunapack case is a nice example
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all …ve types of evidence are utilized
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
6 / 11
Natural Experiments
A good natural experiment
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changes supply conditions
without in‡uencing demand conditions in direct ways
Plant outages
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uncontroversial identi…cation
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Ineos - Kerling merger case (E.Commission)
OMV - MOL pre-merger analysis
Exchange rate movements
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more controversial identi…cation
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pricing strategy of multinational …rms may be unrelated to short-run
‡uctuations in exchange rates
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2
Mondi is an international …rm
direct in‡uence on demand conditions cannot be ruled out
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especially in case of derived demand for intermediate inputs
industrial paper bags are such inputs
Same logic as behind IV in demand estimation
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
7 / 11
Questionnaire Evidence
The only way to get at hypothetical scenarios
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what would you do if ...?
Good questionnaire evidence is
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2
from a representative sample
based credible answers
Evidence can be used in multiple ways
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estimate own-price elasticity of demand and go on with SSNIP test or
merger simulation
get a more qualitative picture of competitive pressure
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
8 / 11
Good Questionnaire Evidence
1. Sample selection
Sample needs to be representative
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need all parties or a random sample
sampling frame and procedure must be appropriate
non-response needs to be low or random
Mondi-Dunapack customer questionnaire
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sampling frame: large buyers
may bias estimates of competitive pressure
question is direction of bias
if larger customers switch harder, competitive pressure may be
underestimated, working against narrow market de…nition
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
9 / 11
Good Questionnaire Evidence
2. Credibility of answers
Why and when should we trust survey answers?
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survey answers are results of human behavior
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costs of giving credible answers depends on di¢ culty of question
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ask about situations that respondents understand easily
bene…ts of giving credible answers are very low
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incentives matter
may be negative if respondent feels potential bene…ts in distorting
answers
in general it is easier to give an honest answer than lie
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that’s why surveys work in case of easy questions with no negative
incentives
But cognitive biases may be important (b/c low incentives)
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home bias may be behind controversial survey evidence in the
Ineos-Kerling case
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
10 / 11
Conclusions
De…ning geographic markets can be di¢ cult
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because estimating demand elasticities is di¢ cult
Many independent sources of information may be necessary
Natural experiments may provide useful case studies
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plant outages are uncontroversial but rare
exchange rate movements are more controversial
Questionnaire evidence can be useful
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sampling and nonresponse are important in representative nature
credibility of answers can be increased by careful questionnaire design
A consistent picture needs to be put together from fragmented
evidence
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one or two pieces may not …t
if so, we better understand why
Gabor Kezdi (CEU)
Mondi-Dunapack. Comments
ACE 2008, Budapest
11 / 11