Lecture 5.
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Facts of the case. Competition Authority alleged ILCU had abused a dominant position in the market for credit union representation services. ILCU established in 1960. Approx 430 credit unions in State members of ILCU. Around 10 non-members. Obligation on member credit unions to purchase LP/LS insurance from ECCU - a wholly owned subsidiary of ILCU. Several CUs obtained insurance elsewhere and were threatened with disaffiliation from ILCU. Rival body CUDA established with approx 20 members - mainly larger CUs.
'From a demand perspective there is no substitute available for credit union representation. The market for credit union representation involves the provision of a complex bundle of products and services to individual members. While certain of the individual products and services offered by a credit union representative organisation could be sourced independently by member credit unions, the nature of the market is such that these would not be adequate substitutes and credit unions would not switch away from the purchase of specialist credit union representation services, such as those provided by the ILCU, in response to a small but significant non-transitory increase in the price of those products or services.' (Emphasis added).
Competition Authority Statement of Claim
Authority expert 'it seems reasonable to argue that both representation services and SPS may be considered distinct relevant markets.'
No evidence to support such claims.
Change in tack at hearing. Authority argued two markets rather than one as originally claimed.
ILCU Argument
- Total payments to ILCU in 2001 €12.9m
- 2.6m members
- Price €4.96 per member
- 5% increase gives price of €5.21 per member.
- Withdrawal of CUDA members would reduce revenue (post increase) to €11.8m
Authority argument changed at trial.
Court ruled in favour of Authority
- Judge held that SSNIP test only one possible method of defining markets.
- Preferred 'commonsense' or 'innate characteristics' test.
- Problem with such tests is that they are subjective.
- Conclusions based on intuition may be wrong.
FTC v. Staples 1997.
- Merger of two office supply superstore chains.
- FTC - relevant market office supply superstores.
- Parties – market all office equipment stores.
- Market share in wider market quite small.
- 'a seemingly hopeless case'. Newsweek 13.7.1998
- Detailed econometric analysis based on scanner data showed presence of smaller suppliers in a geographic location did not constrain pricing behaviour of the merging firms.
- (See Barker and Dalkier and Warren-Boulton for an analysis on this case on reading list).
Pointers for Defining Market
Consumer surveys - FTC in US soft drinks merger cases in mid 1980s.
Attempt to measure consumer responses to possible price increases in order to estimate relevant elasticities.
Need to be framed carefully
Can indicate rough orders of magnitude of the relevant elasticities.
Irish Distillers/Cooley
- Examine firms' past responses:
- to unexpected market shocks. Kimberley/Clark Scott. Failure of prices to converge following Sterling exit from ERM
- to new entry. Procter & Gamble/ VP Schickedanz EU Commission had to consider whether there was a single product market for tampons and sanitary towels in Germany. Entry of P&G's Always brand in 1991. Following 2-3 years tampon prices increased by over 18%, prices of sanitary towels increased by just over 2%.
- to cost increases.
Other Considerations When Defining Markets.
- Supply side substitution. Thus far considered demand side responses but supply side responses also possible
- Potential competition.
- Similarity between both concepts
- Probably more important in merger cases.
Residual Demand Elasticity – Measures Market Power Directly - Used in US Cases.
Defn: Residual Elasticity of Demand is the demand curve facing the individual firm, derived by subtracting supply curves of remaining firms from the overall industry demand curve.
- No need to define market
- Accepted in US cases.
- Lerner index
- (p-c)/p = l
- where p equals price and c is marginal cost.
- Lerner Index is LHS of profit maximisation condition for a monopolist
- (p-c)/p = 1/e
The profit-maximization condition for the dominant firm is precisely the same as that for a monopolist, provided that the elasticity of demand in the condition is understood to be that faced by the dominant firm.
NB Residual elasticity not the same as own elasticity of demand which is used in SSNIP test.
Own elasticity of demand assumes no change in prices of rival suppliers in response to price change by dominant firm. Residual elasticity of demand incorporates price responses of other firms.
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