DRAFT Economics in Chinese merger control David Stallibrass ACLE | 20 th May 2011 Personal views of author. Does not represent opinion or position of any.

DRAFT

Economics in Chinese merger control

David Stallibrass

ACLE | 20th May 2011

Personal views of author. Does not represent opinion or position of any institutions to which he is affiliated.

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Objective of paper

To set the role of economics in Chinese merger control in an institutional context Content of the statute Institutional structure Amount of data / evidence Revealed preference from cases

Understanding of differences in role important for sensible analysis 2

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Caveats

Looking at it from afar – taking the statute and decisions at face value

Looking at mergers that caused problems – only one side of the coin

THIS IS A FIRST DRAFT! Tell me where I’m wrong

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedent Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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Institutional setting

Four key features of merger enforcement regimes that effect the use of economics

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China UK

Purpose of law Multi-dimensional Single objective

Who makes the decisions

Political. Sometimes multi-agency

Technocratic, independent

Importance of precedent

n/a Threat of review forces consistency

Availability of data

Patchy Reasonably good

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedent Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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Purpose of AML – the statute

Article 1: “the purpose of preventing and restraining monopolistic

conduct, protecting fair competition in the market, enhancing economic efficiency, safeguarding the interests of consumers

and social public interest, [and] promoting the healthy development

of the socialist market economy”

7AML as translated by DLA Piper (2008)

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Purpose of AML – the statute

Article 4: “central government to promulgate and implement “competition rules which accord with the socialist market

economy, perfects macro-control, and advances a unified, open,

competitive and orderly market system.”

8AML as translated by DLA Piper (2008)

DRAFTDRAFTPurpose of AML – between the lines?

Relatively clearly implied by articles in the statute Geographic market integration Reform of State Owned Enterprises

Speculated by commentators Building national champions Constraint on intellectual property law

9For example: Bush, Bo (2011)

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The substantive test – the statute

Article 27 – factors considered1. The market share in the relevant market...

and their ability to control the market;2. The degree of concentration in the relevant

market;3. The effect of the proposed concentration over

market entry and the advancement of technology;

4. The effect of the proposed concentration over consumers and other related undertakings;

5. The effect of the proposed concentration over the development of the national economy; and

6. Other factors 10AML as appears in Farmer (2010)

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Comparison with the UK

11Modern Markets, Confident Consumers. DTI (2009). Enterprise Act, 2002, Chinese AML..

Is merger in defined area of “public interest”

Balancing assessment of competition,

efficiency, and “public interest

Impact on consumers

(competition, efficiency, failing

firm) + National Security

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedence Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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A member of the Anti Monopoly Enforcement Authority, and sits on or under

the State Council

Decision making body

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MOFCOM “political” leadership

NDRC

Ministry of Industry and Information Technology Anti Monopoly

Bureau

Case team

Emch (2011, forthcoming), Yee Wah Chin (2010)

Economic, policy, legal support etc.

Trade associations

Third parties, competitors, etc

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Decision making body

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Independent,Technical

Political

Specialist court Genera

l court

Independent specialist

administrative body Technical

section of government department

Policy section of government

department

Political leadership of government departments

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedent Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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Importance of precedence

The more a precedent-based legal system is involved, the more important is precedent Courts as decision makers in US Active appeal courts in UK and EU

Substantially effects decision making process Due process & transparency Repeatable decision rules, precedence

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Importance of precedence

Role of law (and courts) in PRC is much less than it is in some other jurisdictions Less appeals Shorter decisions Less need to create repeatable decision

rules Reduced role of precedent

Though clearly PRC institutions effective at setting expectations that are acted upon

Perhaps just a less formal process...17Clarke (2006, 2007)

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedent Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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Evidence – hard data

Reduced availability of hard data Less reliable national statistics Very limited local data Shorter data series Less transparent filed accounts

(particular for SOEs) Very diverse geographic regions A developing and transitional economy –

in a state of change

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Evidence – soft data

Greater reliance on normative opinions Other companies Other arms of government

...but parties likely to be less sophisticated Few consumer voice organisations (state of

flux?) Business community perhaps not so well

informed / confident But trade associations may have closer

government relations 20Emch (2011, forthcoming), Zhang, Chang (2008)

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedence Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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The role of economics - UK

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UK

Objective function

Single objective

Decision making body

Technocratic, independent

Importance of precedent

Threat of review forced consistency

Availability of data

Reasonably good

Quantify competing effects

Create repeatable decision principles

Clear focus on consumer impact

Decisive element of decision making

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The role of economics - PRC

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China

Objective function

Multi-dimensional

Decision making body

Political, sometimes multi-agency

Importance of precedent

n/a

Availability of data

Patchy

Sometimes “traditional” horizontal effects

Sometimes prospective impact on non-consumer elements of concern

Informing remedy negotiations

Integrated part of broader argument

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Contents

Institutional setting Purpose of the AML Who makes the decisions Importance of precedence Availability of data

The role of economics Revealed preference from cases Suggestions for the future?

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Caveat

...this is where it gets a bit speculative...

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Cases - summary

Features considered

Nature of remedy

Role of economics

Anheuser-Bursch / Inbev

Brands Semi-structural

Prospective, dynamic

Coca-Cola / Huiyan

Brands, foreclosure

None – blocked

Prospective, dynamic, vertical

General Motors / Delphi

Foreclosure Behavioural Prospective, dynamic, vertical

Novartis / Alcon Horizontal incl. collusion

Behavioural Prospective, horizontal

Mitsubishi Rayon / Lucite

Horizontal Structural Horizontal effect on current competition

Pfizer / Wyeth Horizontal Structural Horizontal effect on current competition

Panasonic / Sanyo

Horizontal Structural Horizontal effect on current competition 26

A: PRC

B: TRA

D

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Analysis A – Wider PRC interests

Focus in some cases is on the future – economic analysis could focus there too Impact on development of brands and

technology Less trust that competition will necessarily

producing desired future outcomes Probably requires close integration with

legal team “Econ advice” less of a standalone product? Assistance in remedy design?

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DRAFTDRAFTAnalysis B – Traditional economics in a different market

Reduced data makes (already problematic) analysis of relative market shares even more difficult

Suggests modern Upward Pricing Pressure approaches may be more suitable Evidence on rivalry between firms may

be easier to collect on a case-by-case basis?

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Conclusion

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The objective of the AML is more complex than the objective of A101/102.

The test is more complex.

The decision making body is more political.

There is less evidence.

The comparative advantage of economics as a

decision making principle against a vaguer approach

of compromise and argument is

reduced

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1: prospective analysis with less trust in current competition solving future problems

2: adapt traditional analysis for PRC data and market conditions

3: less separation between legal, economic, and political argument and compromise

Conclusion

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To understand the role of economics, need to understand its role in the

argument and compromise

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Contact details

www.davidstallibrass.com economics@davidstallibrass.com Skype: david.stallibrass

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