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Vertical mergers - EWS/Marcroft. NEIL PRATT. ACE conference, November 2007. Agenda. Framework for assessing input foreclosure Comments on EWS/Marcroft. Vertical merger analysis – preliminaries. No direct loss of rivalry Efficiency rationales Elimination of double marginalisation

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vertical mergers ews marcroft

Vertical mergers - EWS/Marcroft

NEIL PRATT

ACE conference, November 2007

agenda
Agenda
  • Framework for assessing input foreclosure
  • Comments on EWS/Marcroft
vertical merger analysis preliminaries
Vertical merger analysis – preliminaries
  • No direct loss of rivalry
  • Efficiency rationales
    • Elimination of double marginalisation
    • Improved investment incentives
  • Two main unilateral theories of harm
    • Input foreclosure: restrict/degrade input supply
    • Customer foreclosure: limit input purchases
the input foreclosure mechanism

Upstream

entity

Downstream

entity

Downstream

rivals

The input foreclosure mechanism

RRC?

Efficiencies?

Softer competition?

Impact on customers?

analytical framework
Analytical framework

Ability

  • Significance of input to downstream firms
  • VI firm’s market power upstream
  • Barriers to entry and expansion upstream

Incentive

  • Margins in upstream and downstream markets
  • VI firm’s share of downstream market
  • Extent of share-shifting to VI firm
  • Impact on size of downstream market

Effect

  • Competitive significance of foreclosed rivals
  • Impact on barriers to entry
  • Competitive constraint from vertically integrated rivals
  • Merger-specific efficiencies
empirical analysis of incentive
Empirical analysis of incentive
  • ‘Vertical arithmetic’ approach can be used to assess profitability of input foreclosure – e.g.
    • Evraz/Highveld
    • Thales/Finmeccanica/Alcatel Alenia Space & Telespazio
  • Simple analysis can indicate likelihood of foreclosure
    • Estimate cost from foregone upstream margin based on loss of input sales
    • Estimate profit from additional downstream margin based on expected sales diversion
  • More sophisticated simulation approach can help assess competitive effects
ews marcroft background
EWS/Marcroft - background
  • Relatively low value deal in a difficult market
  • Some tricky economic issues to resolve
  • No economic advisers retained by parties
  • Apparently limited data available to CC in certain areas
  • Conflicting evidence from EWS and complainants
vertical foreclosure main lines of debate
Vertical foreclosure: main lines of debate
  • Efficiencies did not play a significant role
    • EWS already vertically integrated
    • Parties did not make strong efficiency claims
  • Debate focused on two key issues:
    • Marcroft’s pre-merger position in the wagon maintenance market
    • EWS’s incentive to lower foreclose rivals in the haulage market
marcroft s pre merger position
Marcroft’s pre-merger position
  • CC relied on structural analysis of wagon maintenance market
    • High share – 56% (volume)
    • Only one rival with national coverage
    • Self-supply not an effective constraint
  • Some conflicting evidence on performance and conduct
    • Poor financial performance of Marcroft
    • Examples of failed attempts to increase prices/lost tenders
  • CC concluded on balance that Marcroft had significant market power
two possible forms of input foreclosure
Two possible forms of input foreclosure
  • Reduction in service quality to haulage companies
    • Increased downtime, less reliable scheduling of works
    • Could be targeted at selected customers
    • Foreclosed customers would face higher costs, or lose contracts
  • Increase in price of maintenance services
    • Conflicting evidence on significance of maintenance relative to operating costs
    • Price increase expected to have some negative impact on rivals
limited evidence on incentive and effect
Limited evidence on incentive and effect
  • Data limitations appear to have precluded application of vertical arithmetic
    • CC points to size of haulage market compared to maintenance market and EWS’s high share
    • Wabtec (and others) not seen as competitive alternative
  • High-level approach to haulage market
    • No concrete examples of potential foreclosure
  • Not much on harm to end users
final remarks
Final remarks
  • EWS/Marcroft follows orthodox approach to vertical mergers
  • Debate focused on empirical questions
    • Market power of Marcroft
    • Profitability and effect of foreclosure
    • Threat of self-supply by e.g. Freightliner
  • Data appears to have been quite limited and contentious in this case
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