Transcript Market Definition, Market Power & Horizontal

Weeks 2 & 3: Market Power, Market
Definition & (Horizontal) Mergers
Francis O'Toole ([email protected])
Department of Economics
Trinity College Dublin
7th October 2011
Introduction: Market Power
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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
Market Power & Merger Policy
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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
Market Power Indicators: Process
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1. Market Definition
2. Market Concentration
3. Barriers to Entry
4. Competitive Environment (unilateral
effects, co-ordinated effects, potential
competition)
5. Efficiencies (merger context)
1. Market Definition
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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
1. Market Definition
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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
1. Market Definition (EU)
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Past: Product Characteristics Approach
Present: Formal Notice (December 1997)
Dominance & Mergers (& State Aids?):
Market Definition Notice
Supply Substitution (included)
1. Market Definition (Ireland)
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Notice in Respect of Guidelines for Merger
Analysis, Decision No. N/02/004, 16
December 2002.
Merger Guidelines being revised.
2. Market Concentration
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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
2. Market Concentration
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Concentration Ratio
Cr = S1 + S2 + ... + Sr (r = 4, 5, .. 8?)
Hirschman-Herfindahl Index (HHI)
HHI = S12 + ... + Sn2
0 < HHI ≤ 10,000
2. Market Concentration
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HHI as a Filter
“Moderately Concentrated”
1,000 < HHI < 1,800
“Highly Concentrated”
1,800 < HHI
HHI as applied?
3. Barriers to Entry
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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)
3. Barriers to Entry: Definitions
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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
3. Barriers to Entry:
Determinants of Market Structure
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Economies of Scale
Diseconomies of Scale
Minimum Viable Scale (MVS)
Minimum Efficient Scale (MES)
3. Barriers to Entry: Examples?
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Learning Curve/Learning-By-Doing
Better Technology
Product Differentiation/Brand Loyalty
Scale Economies/Fixed Costs
Distributional Agreements/Restrictions
“Imperfect” Capital Markets
First-Mover Advantage
3: Barriers to Entry: Entry
Deterrence in Practice
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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)
4. Competitive Environment?
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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
5. Efficiencies (merger context)
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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
5. Efficiencies
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Requirements:
Burden of Proof on Merging Parties
Clear and Convincing Evidence
Efficiencies Specific to Merger
Consumers Must Benefit (Consumer
Surplus or Price Standard)
5. Efficiencies: Examples
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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.”