Price pressure analysis and merger simulation: a UK retrospective Chris Walters Chief Economist, OFT LEAR Conference: The Economics of Merger Control, 27 June 2013
Price pressure analysis and merger simulation: a UK retrospective
Chris WaltersChief Economist, OFT
LEAR Conference: The Economics of Merger Control, 27 June 2013
Overview
UK merger control and UPP, GUPPI, IPR, PPI
Market definition is
dead!
Price pressure analysis is too
hard!
No wait, it’s too easy!
Either way, it’s too
interventionist!
What’s happened to
merger simulation?
Background
UK merger control● Is voluntary, not mandatory
● Is administrative, not judicial
● Is bicameral, not unitary (for the time being!)
● Is well resourced (relatively speaking)
● Lacks compulsory information gathering powers at first phase
Alphabet soup: ingredients
Market definition is dead!
08/09 09/10 10/11 11/12 12/13
5 2 4 4 7
24 20 17 26 25
51 50 52 70 68
Price pressure analysis
Other CRM de-cisions
Non CRM de-cisions
The great majority of
OFT first-phase merger
decisions still rely on
the ‘traditional’ approach
Clearances Decision
Lovefilm/Amazon 15/04/08
Tesco/Brian Ford 22/12/08
Morrison’s/CGL 10/07/09
Sainsbury’s/CGL 09/11/09
Carpetright/Allied Carpets
13/09/10
Asda/CGL 11/01/11
Amazon/Book Depository
26/10/11
Sainsbury’s/Rontec 07/06/12
Conditional clearances Decision
CGL/Somerfield 22/10/08
CGL/LBA 06/03/09
Asda/Netto 23/09/10
Unilever/Alberto Culver 18/03/11
Prince’s/Premier Foods 22/06/11
Shell/Rontec 03/02/12
Jewson/Build Centre 08/02/12
Edmundson/Electric Centre 11/05/12
Mid Counties Co-op/Harry Tuffin’s
18/10/12
Rexel/Wilts 26/10/12
References Decision
Holland & Barrett/Julian Graves
20/03/09
Booker/Makro 08/11/12
Barr/Britvic 13/02/13
Cineworld/City Screen 30/04/13
Lots of retail mergers
It’s all too hard!
Myth● The analysis is too new
● It’s too complicated
● It always uses consumer surveys and they’re too expensive
Reality● Used by OFT regularly since
2005
● The ingredients for alphabet soup are the same as for market definition. But when products are differentiated, markets can look too narrow and price pressure analysis is more sensible. So the focus on margins and diversion is not a consequence of using price pressure analysis, it is the cause of it
● It uses evidence from internal documents, supply disruptions, market research and econometrics as well as consumer surveys
No wait, it’s all too easy!
Myth● The
ingredients may be poorly measured
● The analysis requires lots of hidden and unrealistic assumptions
In defence of assumptions
● This is no more true of alphabet soup than of other evidence
It’s too interventionist!
Myth● The analysis is determinative
● By comparison to the traditional market definition and market share approach, it leads to more intervention
Reality● Analysis is seen in the light of
other evidence: “...the evidence on diversion and the GUPPI calculations corroborate this view.”
● In the UK, it is the parties’ commercial decision to offer divestments at first phase
● Of the 22 ‘price pressure’ cases above, only 4 were referred—same as OFT’s overall reference rate, 18%
● In the 10 conditional clearances, the analysis has been exculpatory to the traditional approach in 8 cases and corroborative of it in 2
Why has merger simulation not delivered on its promise?
Aggregation aggravation• No-one paid 235.4126706p for this steak &
kidney pie!• Are retailers’ and consumers’ preferences the
same?
If retailers and shoppers think that past prices matter (‘was/now’ reference pricing), then why aren’t they in our econometric models?
Consumer behaviour in the real world• 86% of shoppers don’t use a shopping list• 40% of purchases made are on promotion• Shoppers prefer bulk buy deals (BOGOF, 3-for-2)
to explicit price discounts