The Impala case at the CFI

1. The Impala case at the CFI Association of Competition Economists Conference 2007 Simon Pilsbury, Managing Consultant November 30th 2007

2. Overview • institutional structure and its effects on the merger process • Commission’s approach to the initial filing • method of consideration of joint dominance

3. Institutional structure (I) • both initial procedure and re-filing carried out under the 1989 merger regulation • test for whether a merger should be blocked was as follows • ‘creates or strengthens a dominant position as a result of which effective competition would be significantly impeded’ • 2004 merger regulation changes the emphasis • ‘concentration which would significantly impede effective competition … in particular as a result of the creation or strengthening of a dominant position’ • dominant position no longer necessary after 2004

4. Institutional structure (II) • may have impacted the way in which the Commission examined the merger • needed to find unilateral or joint dominance in the market • not sufficient to find ‘pockets’ of market power within a wider economic market • places great emphasis on market definition

5. Commission’s approach to the initial filing (I) • no precise product market definition from the Commission in its decision • stated that it did not make a difference to the outcome • some discussion of whether genres might be individual product markets • precedent suggesting that this might be the case • however, market shares only presented on a ‘whole market’ basis • detailed data by genre not set out

6. Commission’s approach to the initial filing (II) • focus very clearly on market shares • other aspects of potential unilateral dominance left almost untouched • Italy: combined market shares were 30–35% • really no possible market where they approach 40%? • difficult to determine unilateral dominance on the basis of market shares when you haven’t defined a market! • joint dominance considered in much more detail

7. Consideration of joint dominance (I) • as before, markets not clearly defined • makes it more difficult to determine whether there is joint dominance • basic approach in line with the Airtours criteria • transparency • ability to deter • tight oligopoly • looked for evidence of past price coordination • useful for strengthening a dominant position, but creating one? • spent considerable time analysing price trends in each Member State

8. Consideration of joint dominance (II) • content of albums heterogeneous • stated as reducing ability to collude • many features favouring transparency found • retail monitoring • low number of majors • publication of weekly hit charts • but discounts found to be sufficient to undermine transparency • retaliation could be via exclusion from joint ventures • compilation albums important • but no evidence that it had occurred in the past

9. CFI’s comments on joint dominance • CFI found that the market was sufficiently transparent for monitoring to take place • low discounts, which showed little variation • also stated that transparency could be directly inferred from pricing • if prices were closely aligned and above competitive levels • and if no other reasonable explanation • stable pricing despite a fall in demand at a price level seen as high might be evidence of tacit coordination • but wouldn't prices be stable after a demand shock in a competitive market? • lack of punishment episodes not crucial • ‘the most effective deterrent is that which has not been used’

10. Final thoughts • features of the market consistent with a reasonably competitive market pre-merger • differentiated products (albums) each have some small amount of market power • no ability to precisely replicate albums • substitutability largely within genres • costs of production are similar across all majors • demand shocks strongly correlated • no tacit collusion • some albums ‘flop’ and do not cover their costs of production • would expect to see similar pricing across albums • demand shocks would not cause large price cuts • price levels likely to be seen as high to cover costs of flops

11. www.oxera.com Contact: Simon Pilsbury +32 (0) 2 535 7890 simon.pilsbury@oxera.com