Svitzer/Adsteam: Assessing unilateral effects when monopolists merge

1. ANDREA LOFARO Svitzer/Adsteam:Assessing unilateral effects when monopolists merge Association of Competition Economics (ACE) Conference

2. Overview ANDREA LOFARO • Potential competition concern • Analysis of potential entry • What’s the relevant price benchmark?

3. 1. Potential competition concern ANDREA LOFARO • Harbour towage companies operating at different ports do not constrain each other • Apart from Liverpool, merger did not involve any structural change • Concern was whether Svitzer represented the most likely potential entrant into Adsteam ports (and vice versa) • Profitability of parties’ ports was generally either low or negative • Threat of entry represented an effective competitive constraint

4. 2.1 Analysis of Potential Entry ANDREA LOFARO • High fixed costs imply that any entry strategy can only be viable if a sufficient number of customers can be secured • This could be achieved • by displacing the incumbent entirely; or • by cherry-picking certain customers • We analysed the costs of the incumbent and (low-cost) potential entrants for each port

5. 2.2 Average Cost Curves at Different Levels of Operation ANDREA LOFARO 2,500 2,000 1,500 Average costs, Average price (GBP) 1,000 500 2 tugs 3 tugs 4 tugs 5 tugs 6 tugs 0 250 500 750 1,000 Tug Jobs per Year Svitzer AC low cost AC current operation average price

6. 2.3 Entry by displacing strategy ANDREA LOFARO • Non-unionised entrant would face significantly lower costs than Svitzer (Adsteam) • Cost structure of Svitzer (Adsteam) can be used as a proxy for likely costs that Adsteam would face if it decided to enter (and vice-versa) • Operators without current UK operations are at least as likely (if not more likely) entrants into each Svitzer (Adsteam) port than Adsteam (Svitzer)

7. 2.4 Entry by “cherry-picking” strategy ANDREA LOFARO • Strategy might be less costly than previous one as it would require an investment in a smaller number of tugs • E.g. an investment in only 3 tugs could be viable if enough customers do not require more than 3 tugs for each job • Analysis shows that minimum number of tugs (and tug jobs) a (low-cost) entrant would require to break even was generally below the size of the parties’ operations • Cherry-picking strategy would be viable for a non-unionised entrant but not for a unionised company, such as Svitzer or Adsteam

8. 1 2 3 4 business up to 3 tugs business requiring more than 3 tugs Large customers 2.5 Cherry Picking – Customers ranked by Revenue ANDREA LOFARO 2,500 2,000 1,500 Average price (GBP) 1,000 500 0 250 500 750 1,000 Tug Jobs per Year

9. 1 2 3 4 Large customers 2.6 Cherry Picking – Break-Even for Low-Cost Entrant ANDREA LOFARO 2,500 2,000 1,500 Average costs, Average price (GBP) 1,000 500 0 250 500 750 1,000 Tug Jobs per Year business up to 3 tugs business requiring more than 3 tugs low cost AC average price

10. 2.7 Cherry Picking – Effect on Incumbent’s Profits ANDREA LOFARO 2,500 2,000 1,500 Average costs, Average price (GBP) 1,000 cherry picking effect 500 0 250 500 750 1,000 Tug Jobs per Year Svitzer AC with 5 tugs Svitzer AC with fewer tugs Price Incumbent’s post-entry operation Incumbent’s pre-entry operation

11. 2.8 Analysis of Potential Entry – Conclusions ANDREA LOFARO • Neither Svitzer nor Adsteam enjoy a unique cost advantage over other potential entrants • Merger would not reduce the constraint to which each UK “monopoly” port was subject • Should entry occur in those ports for which a cherry picking strategy is viable, Svitzer’s AUC would increase significantly • Threat of losing even a small portion of business likely to provide an effective constraint on incumbents’ behaviour • Consistent with evidence on low profitability of harbour towage services in UK ports due to threat of entry

12. 3.1 What’s the relevant price benchmark? ANDREA LOFARO • Some disagreement with CC over the price benchmark that was relevant for assessing viability of entry • CC considered that after entry, increased competition would drive prices to 10% below their current levels • CC concluded that an operator considering entry would be unlikely to enter UNLESS it could profitably do so at prices 10% below their current levels

13. 3.2 What’s the relevant price benchmark? ANDREA LOFARO • In general, a firm deciding whether to enter will be influenced by post-entry prices (not by current prices) • In some cases, current price provides good proxy for likely post-entry price • In other cases, post-entry price may be substantially below the prevailing price (e.g. textbook case of Bertrand competition) • Incumbent may continue to set high prices without attracting entry • Threat of entry cannot be considered to constrain pre-entry prices

14. 3.3 What’s the relevant price benchmark? ANDREA LOFARO • However CC identified potential entry as THE factor that constrained current prices • consistent with evidence on low profitability • For the new entity to remain constrained it is required that: • customers would be able to sponsor entry (CC’s questionnaire confirmed this) by guaranteeing their business at current prices • rival operators would be able to profitably supply at current prices • Unreasonable to expect parties to demonstrate that entry would have been attractive at prices 10% lower than current levels

15. 3.4 What’s the relevant price benchmark? ANDREA LOFARO • For example, any attempt by Svitzer to raise prices from €100 to €110 would be unprofitable provided that • some customers could respond by guaranteeing their business at a price of 100 to a rival • Rival would be able profitably to supply those customers at 100 • Entrant would not need to offer a significant discount over pre-merger prices • Entrant would not need to be concerned about the effects of a possible post-entry price war • CC’s requirement to assess whether entry would be attractive at a price of €90 was inappropriate