Presentation Transcript

1. Week 2: Market Power, Market Definition & (Horizontal) Mergers

   Francis O'Toole (fotoole@tcd.ie) Department of Economics Trinity College Dublin 11th October 2013
2. Introduction: Market Power Why Market Definition? Market Power! Abuse of Market Power/Abuse of Dominance/SLC (+ Anti-Competitive Agreements + State Aid) Main Example = Horizontal Mergers Economics + Law + Politics (merger control) + Business (why merger?) (Perfect Competition – Monopoly) Spectrum Theoretical Approach
3. Market Power & Merger Policy Protect/Enhance Competition as a Process Substantial Market Power Mitigates Against Competition as a Process Market Power (US) and Dominance (EU) Market Power and Own-Price Elasticity (Market Power and Cross-Price Elasticity) - Cellophane Fallacy Indicators of Market Power
4. Market Power Indicators: Process 1. Market Definition 2. Market Concentration 3. Barriers to Entry 4. Competitive Environment (unilateral effects, co-ordinated effects, potential competition) 5. Efficiencies (merger context)
5. 1. Market Definition Definition of Market Definition Increased Prices and Reduced Demand: A. Demand Substitution (by consumers) B. Supply Substitution (by existing competitors) [not included in US or elsewhere] C. Supply Substitution (by new competitors, i.e. new entry) [kind of included in EU] Example: Winter Shoes, Winter Boots, Winter Footwear
6. 1. Market Definition Benchmark Prices? Abuse of Market Power/Abuse of Dominance - Competitive Prices Current Prices (Cellophane Fallacy) Merger - Current Prices (in general) Counterfactual Analysis! Broad Markets: 10 percent, 24 months Narrow Markets: 5 percent, 12 months
7. 1. Market Definition (EU) Past: Product Characteristics Approach Present: Formal Notice (December 1997) Dominance & Mergers (& State Aids?): Market Definition Notice Supply Substitution (included)
8. 1. Market Definition (Ireland) Notice in Respect of Guidelines for Merger Analysis, Decision No. N/02/004, 16 December 2002. Merger Guidelines being revised.
9. 2. Market Concentration Concentration Increases as: (i) Number of Firms Decrease; and, (ii) “Inequality” in Market Shares Increase Proposed Concentration Measures: Lorenz Curve/Gini Co-efficient Concentration Ratio Hirschman-Herfindahl Index (HHI) SCP Paradigm
10. 2. Market Concentration Concentration Ratio Cr = S1 + S2 + ... + Sr (r = 4, 5, .. 8?) Hirschman-Herfindahl Index (HHI) HHI = S12 + ... + Sn2 0 < HHI ≤ 10,000
11. 2. Market Concentration HHI as a Filter “Moderately Concentrated” 1,000 < HHI < 1,800 “Highly Concentrated” 1,800 < HHI HHI as applied?
12. 3. Barriers to Entry Approaches A: Definitions B: Determinants of Market Structure C: Entry Deterrence in Practice 1968 US Merger Guidelines (Entry ignored) 1982 US Merger Guidelines (Entry central)
13. 3. Barriers to Entry: Definitions Bain (1956) “ ... factors that enable established firms to earn supra-competitive profits without threat of entry.” Stigler (1967) “ ... costs that must be incurred by an entrant that were not incurred by established firms.” Natural, Strategic, Exogenous, Endogenous, … Importance of First-Mover Advantage
14. 3. Barriers to Entry: Determinants of Market Structure Economies of Scale Diseconomies of Scale Minimum Viable Scale (MVS) Minimum Efficient Scale (MES)
15. 3. Barriers to Entry: Examples? Learning Curve/Learning-By-Doing Better Technology Product Differentiation/Brand Loyalty Scale Economies/Fixed Costs Distributional Agreements/Restrictions “Imperfect” Capital Markets First-Mover Advantage
16. 3: Barriers to Entry: Entry Deterrence in Practice Limit Pricing (Output) & Excess Capacity: Credibility and Commitment Raising Rivals’ Costs (e.g. vertical restraints?) Predation (reputation) Brand Proliferation Switching Costs (e.g. quantity discounts)
17. 4. Competitive Environment? Unilateral Price Effects (≈ single firm dominance) Co-ordinated Price Effects (≈ collective dominance) Market Shares: Symmetry, Stability Homogeneity: Firm Structure, Firm Product Transparency Inelastic Market Demand Non-Presence of Maverick Firms Non-Presence of Strong Buyers Non-Presence of Excess Capacity
18. 5. Efficiencies (merger context) Corporate Control Market Efficiency offence originally (entry ignored) Efficiency defence? 1968 Slight Possibility 1984 Clear and Convincing Evidence 1992 Limited Efficiencies Defence Total Surplus (Efficiency) Standard Consumer Surplus (Price) Standard
19. 5. Efficiencies Requirements: Burden of Proof on Merging Parties Clear and Convincing Evidence Efficiencies Specific to Merger Consumers Must Benefit (Consumer Surplus or Price Standard)
20. 5. Efficiencies: Examples Corporate Control Market Economies of Scale/Plant Specialisation Better Integration of Production Facilities Lower Transportation (Distribution) Costs Variable Costs (recurring) v. Fixed Costs (once off) “Efficiency arguments are easy to make, but hard to evaluate.”