MARKET DEFINITION IN ANTITRUST/COMPETITION CASES

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MARKET DEFINITION IN ANTITRUST/COMPETITION CASES

• Presentation to
• Commissioners Malaysia Competition Commission
• by
• Rughvir (Shyam) Khemani, PhD (LSE)
• Microeconomic Consulting and Research Associates
• (www. micradc.com)
• and
• Former Advisor, Competition Policy
• The World Bank Group, Washington D.C., USA
• Kuala Lampur, Malaysia, 8-9 June 2013

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The Purpose of Defining the Relevant Market

• The purpose of defining the relevant market in
  competition cases is
• Assess the nature and degree of competition
  prevailing in the delineated relevant market
• Evaluate whether the firm(s) against which a
  complaint has been registered possess market
  power
• And gauge whether or not the firm(s) has/have/not
  exercised or are in a position to exercise
  market power in the relevant market
• Market power refers to the firm(s) ability to
  profitably charge prices above the competitive
  level for a sustainable period of time and/or
  affect other competitive conditions to the
  detriment of consumers

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The Concept of the Relevant Market-1

• The concept of the relevant market applied in
  competition/antitrust analysis is not the same
  conventionally used by business, and broadly in
  economics and marketing
• Both demand and supply factors are
  considered. From demand side only the market (or
  sub-market) is delineated where the customers are
  able and willing to substitute away from one
  product in response to an actual or potential
  increase in price or a corresponding non-price
  change e.g., reduction in product quality or
  service. The delineated market will include the
  product/service being examined as well as the
  substitutable products/service which customers
  may switch to.

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The Concept of the Relevant Market-2

• From a supply side, firms/suppliers are included
  in the delineated market if they are already
  supplying the product/service that customers can
  switch to.
• Competition Agencies give greater
  weight/consideration to demand side
  substitution than to the supply side
  substitution, which may none the less bear
  importantly on gauging market power.
• In many court cases both demand and supply side
  responses to defining the relevant product market
  have been utilized.

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Case Example Alleged Cartel in Steel Rods

• Complaint registered by Builders Association
  alleging Steel Rod Wire Mesh producers have
  cartelized the market and are charging
  identical/or very similar excessively high
  prices. The Association presents the following
  facts
• There are three major steel rod manufacturers
  with guess-estimated market
  sharesPSM35,FJ25,AF20 and 3 smaller firms
  combined 15 plus some imports
• In past 4-5 years prices of 3 largest firms
  tended to vary between 5-7 but in last year
  they have been virtually identical.
• Firms supply on a contract basis but also in
  the open market, but recently only on a contract
  basis 6-12 months with required purchase of
  minimum quantities at negotiated
  prices. (continued)

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Steel Rod Case Complaint--continued

1. There is little variation in market shares or
   rank of the leading 3 firms.
2. Steel rods and wire mesh products of firms are
   almost identical except for different strengths
   and cannot be substituted with other materials.
3. Steel rods and wire mesh are essential in
   construction of multi-story apartment and office
   buildings.
4. There is a construction boom and the builders
   cannot meet demand due to difficulties in
   obtaining steel rod-wire mesh supplies.
5. Some of the largest firms as well as
   medium-smaller firms are refusing supply to new
   customers.
6. It is alleged that the cartel is aimed at price
   gouging of builders to their detriment and
   downstream customers

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Steel Rod Case Example Investigation-1

• The Commission decided their was a prima facie
  case and directed the Investigation Branch to
  investigate. The Director of the Investigation
  Branch reported back that
• The relevant market was analyzed taking into
  demand and supply factors. It was determined that
  steel rods and wire mesh each constituted
  separate product markets with no alternative
  substitutes. In terms of supply the relevant
  product market comprised of all producers in the
  greater metropolitan area. Two smaller producers
  were located at some geographic distance and
  were deemed not part of the relevant market due
  to transportation costs. Imports were mainly in
  the coastal towns. Market share of the three
  largest firms was therefore higher than the
  complainant indicated.

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Steel Rod Case Example Investigation-2

• In delineating the relevant market the Director
  had examined availability of other products that
  could be interchanged with steel rods and wire
  mesh and found none that could be considered
  significant. Small number/percentage of builders
  had used nylon/synthetic mesh and/or
  non-steel/iron/ferrous metal rodsbut for low
  rise buildings.
• Prices of the products had indeed varied in the
  past but recently were stable/almost identical.
  There was a high correlation between prices of
  different firms in the metropolitan and regional
  areas though prices in the latter were much
  higher.

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Steel Rod Case Example Investigation-3

• There did not seem to be a relationship between
  prices and costs, and prices and price cost
  margins had increased significantly in recent
  years. Price changes were uncorrelated with cost
  changes.
• There was Steel Products Manufacturers
  Suppliers Association that met quarterly.
• Minutes of Association meetings discussed high
  costs of energy and raw materials, investment
  plans, expansion of capacity, lobbying government
  for favorable tax treatment on earnings and
  wages, concerns of dumping by China in coastal
  markets areas, etc. No evidence, even anecdotal
  referred to prices, output, and/or sales.

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Steel Rod Case Example Investigation-4

1. The Director indicated that to determine the
   relevant market the SSNIP test and the
   Elzinga-Hogerty (E-H) test had been applied.
2. The SSNIP Test entailed assuming that if any two
   of the three largest firms decided to merge,
   would the merged firm be able to impose
   profitably a Small but Significant
   Non-transitory Increase in Price without losing
   customers to other existing or new competitors?
3. The E-H test was applied to delineate the
   geographic market. Product inflows and
   outflows were examined to determine that 90 of
   steel rods and wire mesh purchased in the
   metropolitan area came from manufacturers in that
   area.

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Steel Rod Case Example Investigation-5 The
Directors Conclusion

• Based on the analysis outlined above, it was
  concluded that the steel rod and wire mesh
  producers had exercised market power to
  cartelized the metropolitan market to earn excess
  profits.
• The Director estimated that compared with past
  years, on average the prices were 10 higher and
  the profit margins were 10-15 higher.
• The Director recommended that a appropriate fine
  be levied by the Commission, taking into account
  the higher prices and profit margins, based on
  the past years sales revenue when the firms
  started to charge similar/identical prices.

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The Commissions Deliberations

• Internally two of the five members of the
  Commission had some reservations about the
  Directors Investigation Report, analysis,
  findings and conclusions. Before deciding on the
  matter, hearings were held. The various firms
  were presented confidential versions of the
  report, and requested to respond in writing and
  appear in camera hearings.
• Each firm individually presented
  counter-arguments by senior executives,
  marketing-sales staff, production managers,
  economic experts and legal representatives
• A brief synthesis of the main counter arguments
  were

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The Counter-Arguments-1

• The Relevant Market has not been properly
  defined. Steel rods are substitutable with other
  ferrous metal rods and wire mesh is substitutable
  with nylon/plastic/resin based mesh.
• Q. How to validate this counter-claim?
• The SSNIP test is only applicable in assessing
  the actual or potential effects on competition of
  a merger and not in alleged existing cartel
  cases.
• Q. If this is the case then why have SSNIP tests
  in Market Definition Guidelines?
• High price correlations do not indicate firms are
  necessarily colluding or even in the same market.
  All firms have common cost elements(energy, iron)
  the changes in which result in high correlations.
• Q. Are the correlations spurious?

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The Counter-Arguments-2

• High prices, high profit margins are not illegal.
  Nor do prices necessarily correlate with costs
  during boom periods where demand exceeds
  supply.
• Q. How should these and what other factors be
  weighed?
• Prices previously varied due to low levels of
  demand, firm(s) excess capacity, weak bargaining
  power vis-à-vis builders.
• Q. How should excess capacity and relative
  bargaining power be considered in relevant
  market definition and gauging market power?

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The Counter-Arguments-3

• Firm(s) are currently operating at full capacity.
  Contract sales has always been a usual feature of
  the market and given high demand very little
  production can be supplied in the outside market.
• Q. How are captive and contract outputs to
  be treated in defining the relevant market?
• There is oligopolistic inter-dependence between
  the leading three producers, and prices tend to
  converge as price-output changes by one are
  countered/followed by the other large
  firms.other smaller firms follow in their
  pricing policies. The Director is using
  conscious parallelism/ circumstantial
  evidence to infer cartelized behavior
• Q. Is this sufficient? What plus factors
  could be considered?

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The Counter-Arguments-4

• If the firm(s) has/have indeed cartelized the
  market, the maximum price that the
  customers/market can bear are already being
  charged. Any market power the firm(s) has/have
  is already being exercised.
• Q. Is the Directors case falling into the
  cellophane trap in defining the relevant
  market and exercise of market power?
• The Directors Investigation relates only to one
  yearwhich is too short a period to conduct
  competition analysis.
• Q. What should be the period of competition
  analysis especially re alleged cartel?

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The Case Decision

• The Commission was divided in its deliberations.
  No direct evidence of written or oral/tacit or
  overt information on alleged cartel behavior was
  presented in the Investigation Report.
• Many of the counter-arguments made sense but at
  the same time the builders complaint that there
  was little change in market shares, rank of
  firms, the fact that there had been no new entry
  and other such factors weighed heavily in the
  Commissions discussion.
• The Commission decided to take a recess before
  concluding.
• What should be its conclusion re the relevant
  product market, market power and alleged
  cartelized behavior?