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5 Oligopoly Notes

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5 - Coordinated Effects & Oligopoly Mind Map Abbreviation EC - European Commission Guidelines - US Horizontal Merger Guidelines Increase Introduction

1. To determine how should the European Council Merger Regulation ("Merger Regulation") to mergers in oligopolistic markets.

2. As mentioned in previous chapters, Merger Regulation enables the EC to prohibit, or allow subject to conditions, a merger which "creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it".

3. However, it is uncertain whether the Merger Regulation also applies to mergers which strengthened not a dominant position of a single firm but rather a position of "collective dominance". (Refer to case Kali und Salz)

4. Kali und Salz: A merger which creates an oligopolistic market structure which has the effective competition to the small number of companies comprising the oligopoly is impeded can also be prohibited. It seems like the merger control deals with mergers which would reduce competition in an oligopolistic market but most of the markets in a developed economy will have oligopolistic criteria. Difference between "Dominance" and "Collective Dominance" Dominance

Collective DominanceA position of economic strength enjoyed by an undertaking which enables it to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers.This refers to "single dominance, or the dominance of one company in the market".A position of economic strength held by a group of companies that enjoy to a significant degree a lack of competitive constraint.

1 ?

The dominance that several firms hold together in a market.Thus, definition of "dominance is less appropriate as jointly dominant firms might be able to behave together independently of the other firms in the market.

Unilateral effects

Coordinated effects

"Unilateral effects" ->
(1) the reduction in welfare because of the increase in prices and reduction in output by the merged firm when the merger creates a single dominant firm in the market; or (2) the consequences of mergers in oligopolistic markets which do not lead to single dominant firms, but create more tightly knit oligopolies; or (3) the overall detrimental welfare effects as a result of the individual changes/ adjustments in prices + output that occur in the market following a merger in an oligopolistic market.

"Coordinated effects" -> the reduction in welfare caused when the merger enables a collusive equilibrium to emerge in the market.

Section 2.2 of the Guidelines:

Section 2.1 of the Guidelines:

Unilateral effects "A merger may diminish competition even if it does not lead to increased likelihood of successful coordinated interaction, because merging firms may find it profitable to alter their behaviour unilaterally following the acquisition by elevating price and suppressing output".

Coordinated effects "A merger may diminish competition by enabling the firms selling in the relevant market more likely, more successfully, or more completely to engage in coordinated interaction that harms consumers. Coordinated interaction is comprised of actions by a group of firms that are profitable for each of them only as a result of the accommodating reactions of the others. This behaviour includes tacit and express collusion and may or may not be lawful in and of itself".

? The price is profitable regardless of the actions of other firms in the market.

"Collusion" -> the firms' attempt to reach the joint profit maximising outcome, resulting in higher prices and lower output than the competitive levels (tacit or otherwise).

2 ?

The agencies have suggested that a merger needs to create a "very large market share, e.g. > 35%", for significant unilateral effects to be likely.

"Unilateral competitive effects can arise in a variety of different settings. In each setting, particular other factors describing the relevant market affect the likelihood of unilateral competitive effects. The settings differ by the primary characteristics that distinguish firms and shape the nature of their competition. These include a merger between 2 firms in a product differentiated market which produce close substitutes and which, after the merger, would command a large share of the market, and a situation where competitors would be unable to increase their own output, say because of capacity constraints, to take advantage of competitive opportunities offered if the merging firms were to raise their prices after the merger".

"Successful coordinated interaction entails reaching terms of coordination that are profitable to the firms involved and an ability to detect and punish deviations that would undermine the coordinated interaction. Detection and punishment of deviations ensure that coordinating firms will find it more profitable to adhere to the terms of coordination than to pursue short term profits from deviating, given the costs of reprisal" Note*:
? This requires competitors reach an agreement and it is possible to detect and punish firms that breach the agreement.Coordination becomes easier, and thus more likely, as a market becomes more concentrated.Where there has been collusion in the past, conditions in that market are likely to be seen as conducive to coordination.

? "Entry conditions into the relevant market" - key factor in the assessment of possible anti-competitive effects, whether coordinated or unilateral. How collective dominance turned into coordinated effects Examples of a dominant position "by one or more undertakings" lead to potential collusive effects of mergers in narrow oligopolies:Nestle/Perrier case

3 EC: Nestle and BSN would acquire a collective dominant position on the market for bottled spring water in France. A number of theoretically relevant factors to considered: high post-merger market shares, capacities, limited reaction of outsiders and increased dependencies of wholesalers and retailers on the parties.Kali+Salz/MDK/Treuhand EC: relying on the existence of structural links + concluded that the transaction would create a dominant duopoly between the parties.Gencor/ Lonrho EC: the parties would have acquired a dominant duopoly position in the worldwide markets for platinum and rhodium. EC relied on the concept of homogeneity of products, high transparency and increased symmetry in the absence of structural links, which were deemed not necessary.Airtours v Commission (Landmark judgment) CFI annulled for the 1st time a prohibition decision under the ECMR. In 1999, EC prohibited the merger of 2 UK suppliers of foreign package holidays due to the reason that the transaction was expected to result in the creation of a collective dominant position. However, the CFI clarified the standard for finding collective dominance by rejecting the application of a "checklist" approach (i.e. analysing the market characteristics conducive to coordination). It laid down 3 conditions (a more dynamic approach + sustainability mechanism of tacit collusion). (1) the market must be transparent enough to allow monitoring of other firms' market conduct. (2) coordination must be sustainable: the participants must be deterred from defection by fear of retaliation. (3) the benefits of coordination must not be jeopardised by the actions of current or future competitors or customers.

Oligopoly Game Theory Models of Oligopoly (1) Game theoretic models specify:
? the number of players;
? the number and length of periods in the game, that is, the frequency of market interaction;
? the payoffs;
? the strategies available to players; 4

?the information available to players; and the way in which players form beliefs about each other and each other's strategies.

(2) A wide variety of oligopoly behaviour is observable. (3) Firms continually devise new competitive strategies as well as strategies to lessen competition among them. (4) Game theory is not rewriting this list of factors/giving all the answers about oligopolistic behaviour including the exact circumstances under which collusion will occur but to provide a consistent frame of reference. (5) The game theoretic methodology enforces a systematic approach to the analysis of oligopolies. By clearly stating the assumptions that underlie the game, the applicability of the models' conclusions becomes more transparent. (6) In modelling oligopolistic interaction, it is realistic to assume that firms meet in the market repeatedly. Repeated interaction has long been recognised as the prerequisite for collusion to be possible. (7) Even though some of the game theoretic models are at a very abstract level, they have clear implications for oligopolistic interaction. From these models, it is possible to extract necessary criteria for tacit collusion.

Conditions for Coordinated Conduct in Oligopolistic Markets Necessary Criteria (1) Very few firms

Factors that contribute to the necessary criteriaA small number of firms enhance the capacity of firms to reach a tacit understanding and to maintain it over time.The more firms in the market, the more difficult to coordinate.The less forms in the market, the easier to monitor the firms. Thus, the more firms in the market, the higher possibility for the firms to deviate from the agreement because it can increase its profit by chiselling. 5

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