1、Market DefinitionPresentation to the Competition Commission of IndiaUS Chamber of CommerceOctober 26, 2010Overview Market power Market definition Relevant product market Relevant geographic market Case studiesMarket Power“Mergers should not be permitted to create, enhance, or entrench market power o
2、r to facilitate its exercise.” (Source: Horizontal Merger Guidelines)Market Power is the ability of a firm or a group of firms in a market to profitably raise prices, reduce quality, or slow down innovation for a significant period of time compared to these outcomes in a competitive marketMarket pow
3、er and monopoly power are often used interchangeablyAnalysis of Market Power Market structure approach / Indirect approach Market definition Market shares Market concentration Barriers to entry and expansion Perception of market participantsCompetitive effects analysis / Direct approach Predict post
4、-merger price effects Elasticity of demandMarket DefinitionIn determining whether a transaction will create or enhance market power, the agencies and the courts look at the relevant markets within which the competitive effects are to be assessedRelevant Markets: Two ComponentsGeographyNew YorkMiamiC
5、hicagoLos AngelesProductImportance of Market DefinitionSpecifies the product and geographic scope in which the competitive concern may arise May be different from how industry members uses the term “market”Identifies market participants, shares, and concentration Allows one to identify the competiti
6、ve alternatives available to customersMarket DefinitionJust because two products are used for similar purpose does not imply that they are in the same “antitrust” marketOr evenRelevant Product MarketIdentifies a product or a set of products such that firms producing those products can defeat each ot
7、hers attempts to raise the price above the competitive level Demand substitution Customers ability and willingness to substitute away from one product to another in response to an increase in price or a reduction in qualityDemand Substitution: SSNIP TestHypothetical Monopolist/SSNIP Test: “A hypothe
8、tical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products likely would impose at least a small but significant non-transitory increase in price on at least one product in the market, including at least one product sold by one of the
9、merging firms”Demand Substitution: SSNIP TestSSNIP is a methodological toolIdentifies a set of products that are reasonably interchangeable with a product sold by a merging partyEnsures that markets are not defined too narrowlyThe most commonly used price increase threshold is 5%Demand Substitution:
10、 Implementation of SSNIPExtent to which customers will substitute away from the product in question Examine how customers have shifted their purchase patterns in the past Survey on how the buyers would respond to a price change Interview customers and competitors to assess views on alternative produ
11、cts and competitors Identify the existence of switching costsIncremental profit margins on the product Estimate incremental cost using merging parties data and/or documents Incremental cost is measured over the change in output that would be caused by the hypothetical price increaseDemand Substituti
12、on: Critical LossDoes imposing a SSNIP raise or lower the hypothetical monopolists profits? Higher profits on sales made at higher prices Lower quantity demand as consumers substitute away“Critical Loss” is the number of lost unit sales that would leave profits unchangedPrice increase is profitable
13、if: “Predicted Loss” “Critical Loss”Supply SubstitutionSupply substitution Suppliers ability and willingness to substitute away from their existing production facilities to make competing alternative products in response to an increase in price or reduction in quality of the product(s) at issueUsefu
14、l for identifying market participants, analyzing competitive effects, and potential entrySupply Substitution: ImplementationIdentify potential suppliers (“rapid entrants”) that are likely to provide rapid supply response without incurring significant sunk costsInterview potential suppliers about fea
15、sibility of substitution, costs of switching between products, and the time it would take to switchAnalyze whether the potential suppliers have idle capacity or readily available “swing” capacityDetermine whether the customers would use the potential suppliers productsRelevant Geographic MarketIdent
16、ifies a geographic area such that firms in that area can defeat each others attempts to raise the price above competitive level Both supplier and customer locations can affect the scopeThe principle behind defining a geographic market is similar to that used for defining a product marketSSNIP Test T
17、he scope of a geographic market depends on transportation cost, language, regulation, tariff barriers, among othersThe geographic market may be local, regional, national, continent-wide, or even world-wideMarket Definition: Recent CasesFTC v. StaplesU.S. v. OracleFTC v. Whole FoodsFTC v. Staples: Ba
18、ckgroundStaplesthe second largest office superstore in the U.S. with almost 500 stores in 28 states and DCOffice Depotthe largest office superstore chain in the U.S. with more than 500 stores in 38 states and DCOn September 4, 1996, Staples and Office Depot entered into a merger agreementFTC v. Stap
19、les: FTCs ClaimsThe proposed merger will result in competitive harm as a result of the loss of competition Between the only office supply superstores (OSS) in many metropolitan areas (merger to monopoly) Between two of only three office supply superstores in many other areas (3-to-2 merger)FTC v. St
20、aples: Market DefinitionFTC defined the relevant product market to be the sale of consumable office supplies through office superstoresFTC v. Staples: Market DefinitionParties argued the relevant product market was simply the overall sale of office supplies through all venues Staples and Office Depo
21、t account for only 5.5% of salesFTC v. Staples: Market DefinitionThere was no dispute about the localized geographic market Consumers are unwilling to travel very far to purchase office suppliesFTC v. Staples: Evidence from Documents Staples charges more than 5% higher where it has no office superst
22、ore competition than where it competes with the two other superstoresPrice checking and tracking entry focuses largely on OSS and not other types of storesStaples cut prices when an OSS entered, but did not do so when a non-OSS enteredFTC v. Staples: Empirical EvidencePrices at Staples stores are 13
23、% higher in one-firm geographic areas than those in three-firm areasPrices at Office-Depot stores are more than 5% higher in one-firm areas than in three-firm areasFTC v. Staples: Courts FindingsFunctional interchangeability does not mean that two products are in the same relevant market All compete
24、 at some level but not enough to constrain priceLow cross-price elasticity of demand between office superstores and other retail sources of office supplies Slight increase in price does not cause consumers to switch to Wal-Mart, Best Buy, Quill, Viking, etc.The appropriate product market definition
25、is the sale of consumable office supplies through office supply superstoresU.S. v. Oracle: BackgroundOraclean integrated business software company with offices in 80 countries and sells products in over 120 countriesPeopleSoftanother business software company with offices in Europe, Japan, Asia-Paci
26、fic, Latin America and other parts of the world and sells products in most major marketsOracle initiated its tender offer for the shares of PeopleSoft on June 6, 2003U.S. v. Oracle: BackgroundEnterprise resource planning (ERP) software integrates most of an entitys data across all or most of its act
27、ivitiesERP software are licensed to end-users along with maintenance and upgradesThe range of activities handled by ERP software Human resource management (HRM) Financial management system (FMS) Consumer relations management (CRM) Supply chain management (SCM) Product cycle managementU.S. v. Oracle:
28、 DOJs Claims“High function HRM and FMS” sold by Oracle, PeopleSoft, and SAP are the only HRM and FMS productsThe proposed merger would constrict this highly concentrated oligopoly to a duopoly of SAP America and a merged Oracle/PeopleSoftU.S. v. Oracle: Market DefinitionDOJ defined the relevant mark
29、et to be “high functional software” in the U.S. Based on this market definition, the merger would be a 3-to-2 mergerOracle did not propose a product market definition, but claimed that DOJs definition was too narrow: The relevant product market also includes “mid-market vendors,” “outsourcing,” and
30、“best of breed solutions” The relevant geographic market is worldwide, or at the very least, the U.S. and EuropeThe basic approach used by both sides for defining markets was SSNIPU.S. v. Oracle: EvidenceCustomer testimony on purchasing decisions played a key role in supporting DOJs market definitio
31、n Ten customer witnesses Five industry witnesses three system integration witnessesOther evidence Oracles discount approval forms Market research studyU.S. v. Oracle: Courts FindingsCustomer evidence offered in support of the claim was largely unhelpful and only stated preferences The relevant issue
32、 is what customers could do in the event of an anticompetitive price increase post-transaction Unsubstantiated customer apprehensions do not substitute for hard evidenceWithout a properly defined relevant market, the Court could not pursue market share, market concentration analysesDOJ proposed a ve
33、ry restricted product market definitionFTC v. Whole Foods: BackgroundWhole Foodsthe largest grocery chain specializing in premium natural and organic (PNO) foods with more than 190 stores in more than 30 states and DCWild Oatsthe second largest PNO supermarket chain operating 74 stores in 24 statesO
34、n February 21, 2007, Whole Foods executed an agreement proposing to acquire Wild OatsFTC v. Whole Foods: BackgroundNatural foods are minimally processed and largely free of artificial ingredients and preservativesOrganic foods are produced using agricultural practices that promote healthy ecosystem
35、No genetically engineered seeds or long-lasting pesticides Healthy and humane livestock management practicesAll products labeled “organic” must be meet USDA standardsFTC v. Whole Foods: FTCs ClaimsThe proposed merger will increase prices and reduce quality and services in a number of geographic mark
36、ets throughout the U.S. Eliminated one of only two or three PNOs in a number of geographic markets Eliminated significant price- and non-price competition Resulted in the closing of numerous Wild Oats storesFTC v. Whole Foods: Market DefinitionThe FTC defined the relevant product market to be “premi
37、um natural and organic supermarkets” The relevant geographic market ranged from five or six miles in radius from a PNO to a metropolitan areaOther PNOFTC v. Whole Foods: Market DefinitionMerging parties said they competed with other large grocers like Krogers and SafewayOther PNOFTC v. Whole Foods:
38、Evidence from DocumentsPNO supermarkets “offer a distinct set of products and services to a distinct group of customers in a distinctive way”The parties were each others “closest competitors” in a number of geographic areasInternal documents reflected direct competition between the partiesWhole Food
39、s targeted markets for entry where Wild Oats enjoyed a “monopoly”FTC v. Whole Foods: Quantitative EvidenceWhole Foods took significant shares away from Wild Oats wherever they had opened new storesPrices at Whole Foods stores did not vary depending on the presence of Wild Oats stores Direct contrast to Staples pricing analysisFTC v. Whole Foods:OutcomeThe FTC and the parties announced a settlement on March 6, 2009Under the consent order, Whole Foods agreed to sell 32 PNOs and share intellectual property related to “Wild Oats” brandQuestions/Comments
