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1、Market Definition,Presentation to the Competition Commission of IndiaUS Chamber of CommerceOctober 26,2010,Overview,Market powerMarket definitionRelevant product marketRelevant geographic marketCase studies,Market Power,“Mergers should not be permitted to create,enhance,or entrench market power or t
2、o 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 power and
3、monopoly power are often used interchangeably,Analysis of Market Power,Market structure approach/Indirect approachMarket definitionMarket sharesMarket concentrationBarriers to entry and expansionPerception of market participantsCompetitive effects analysis/Direct approachPredict post-merger price ef
4、fectsElasticity of demand,Market Definition,In 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 assessed,Relevant Markets:Two Components,Geography,New York,Miami,Chicago,Los A
5、ngeles,Product,Importance of Market Definition,Specifies the product and geographic scope in which the competitive concern may ariseMay be different from how industry members uses the term“market”Identifies market participants,shares,and concentrationAllows one to identify the competitive alternativ
6、es available to customers,Market Definition,Just because two products are used for similar purpose does not imply that they are in the same“antitrust”market,Or even,Relevant Product Market,Identifies a product or a set of products such that firms producing those products can defeat each others attem
7、pts 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 quality,Demand Substitution:SSNIP Test,Hypothetical Monopolist/SSNIP Test:“A hypothetical prof
8、it-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 merging firms
9、”,Demand Substitution:SSNIP Test,SSNIP 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:Implementat
10、ion of SSNIP,Extent to which customers will substitute away from the product in questionExamine how customers have shifted their purchase patterns in the pastSurvey on how the buyers would respond to a price changeInterview customers and competitors to assess views on alternative products and compet
11、itorsIdentify the existence of switching costsIncremental profit margins on the productEstimate incremental cost using merging parties data and/or documentsIncremental cost is measured over the change in output that would be caused by the hypothetical price increase,Demand Substitution:Critical Loss
12、,Does imposing a SSNIP raise or lower the hypothetical monopolists profits?Higher profits on sales made at higher pricesLower quantity demand as consumers substitute away“Critical Loss”is the number of lost unit sales that would leave profits unchangedPrice increase is profitable if:“Predicted Loss”
13、“Critical Loss”,Supply Substitution,Supply substitutionSuppliers 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 issueUseful for identifying mar
14、ket participants,analyzing competitive effects,and potential entry,Supply Substitution:Implementation,Identify potential suppliers(“rapid entrants”)that are likely to provide rapid supply response without incurring significant sunk costsInterview potential suppliers about feasibility of substitution
15、,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 products,Relevant Geographic Market,Identifies a geographic area su
16、ch 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 The scope of a geographic m
17、arket depends on transportation cost,language,regulation,tariff barriers,among othersThe geographic market may be local,regional,national,continent-wide,or even world-wide,Market Definition:Recent Cases,FTC v.StaplesU.S.v.OracleFTC v.Whole Foods,FTC v.Staples:Background,Staplesthe second largest off
18、ice 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 agreement,FTC v.Staples:FTCs Claims,The proposed merger will
19、result in competitive harm as a result of the loss of competitionBetween 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.Staples:Market Definition,FTC defined the relevan
20、t product market to be the sale of consumable office supplies through office superstores,FTC v.Staples:Market Definition,Parties argued the relevant product market was simply the overall sale of office supplies through all venuesStaples and Office Depot account for only 5.5%of sales,FTC v.Staples:Ma
21、rket Definition,There was no dispute about the localized geographic marketConsumers are unwilling to travel very far to purchase office supplies,FTC v.Staples:Evidence from Documents,Staples charges more than 5%higher where it has no office superstore competition than where it competes with the two
22、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 entered,FTC v.Staples:Empirical Evidence,Prices at Staples stores are 13%higher in one-firm geographic areas than those in th
23、ree-firm areasPrices at Office-Depot stores are more than 5%higher in one-firm areas than in three-firm areas,FTC v.Staples:Courts Findings,Functional interchangeability does not mean that two products are in the same relevant marketAll compete at some level but not enough to constrain priceLow cros
24、s-price elasticity of demand between office superstores and other retail sources of office suppliesSlight increase in price does not cause consumers to switch to Wal-Mart,Best Buy,Quill,Viking,etc.,The appropriate product market definition is the sale of consumable office supplies through office sup
25、ply superstores,U.S.v.Oracle:Background,Oraclean 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-Pacific,Latin America and other parts of the world and sells produc
26、ts in most major marketsOracle initiated its tender offer for the shares of PeopleSoft on June 6,2003,U.S.v.Oracle:Background,Enterprise resource planning(ERP)software integrates most of an entitys data across all or most of its activitiesERP software are licensed to end-users along with maintenance
27、 and upgradesThe range of activities handled by ERP softwareHuman resource management(HRM)Financial management system(FMS)Consumer relations management(CRM)Supply chain management(SCM)Product cycle management,U.S.v.Oracle:DOJs Claims,“High function HRM and FMS”sold by Oracle,PeopleSoft,and SAP are t
28、he only HRM and FMS productsThe proposed merger would constrict this highly concentrated oligopoly to a duopoly of SAP America and a merged Oracle/PeopleSoft,U.S.v.Oracle:Market Definition,DOJ defined the relevant market to be“high functional software”in the U.S.Based on this market definition,the m
29、erger 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“best of breed solutions”The relevant geographic market is worldwide,or at the very least,th
30、e U.S.and EuropeThe basic approach used by both sides for defining markets was SSNIP,U.S.v.Oracle:Evidence,Customer testimony on purchasing decisions played a key role in supporting DOJs market definitionTen customer witnessesFive industry witnessesthree system integration witnessesOther evidenceOra
31、cles discount approval formsMarket research study,U.S.v.Oracle:Courts Findings,Customer evidence offered in support of the claim was largely unhelpful and only stated preferencesThe relevant issue is what customers could do in the event of an anticompetitive price increase post-transactionUnsubstant
32、iated customer apprehensions do not substitute for hard evidenceWithout a properly defined relevant market,the Court could not pursue market share,market concentration analyses,DOJ proposed a very restricted product market definition,FTC v.Whole Foods:Background,Whole Foodsthe largest grocery chain
33、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 statesOn February 21,2007,Whole Foods executed an agreement proposing to acquire Wild Oats,FTC v.Whole Foods:Backgr
34、ound,Natural foods are minimally processed and largely free of artificial ingredients and preservativesOrganic foods are produced using agricultural practices that promote healthy ecosystemNo genetically engineered seeds or long-lasting pesticidesHealthy and humane livestock management practicesAll
35、products labeled“organic”must be meet USDA standards,FTC v.Whole Foods:FTCs Claims,The proposed merger will increase prices and reduce quality and services in a number of geographic markets throughout the U.S.Eliminated one of only two or three PNOs in a number of geographic marketsEliminated signif
36、icant price-and non-price competitionResulted in the closing of numerous Wild Oats stores,FTC v.Whole Foods:Market Definition,The FTC defined the relevant product market to be“premium natural and organic supermarkets”The relevant geographic market ranged from five or six miles in radius from a PNO t
37、o a metropolitan area,Other PNO,FTC v.Whole Foods:Market Definition,Merging parties said they competed with other large grocers like Krogers and Safeway,Other PNO,FTC v.Whole Foods:Evidence from Documents,PNO supermarkets“offer a distinct set of products and services to a distinct group of customers
38、 in a distinctive way”The parties were each others“closest competitors”in a number of geographic areasInternal documents reflected direct competition between the partiesWhole Foods targeted markets for entry where Wild Oats enjoyed a“monopoly”,FTC v.Whole Foods:Quantitative Evidence,Whole Foods took
39、 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 storesDirect contrast to Staples pricing analysis,FTC v.Whole Foods:Outcome,The 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”brand,Questions/Comments,
