Professional Documents
Culture Documents
Practical application
Qualitative tools Latvian beer inquiry, 2009 Quantitative -- COMP/M.5046 Campina/Friesland
Conclusions
Would a hypothetical monopolist (the only seller of bananas, the only Brussels-Frankfurt flight route provider) find it profitable to increase the price above current level in a non-transitory way by 510%? ? - Are there other fruits substitutable to bananas (United Brands v. Commission (27/76)) ? - Are there other travel possibilities (e.g., fast-speed train) substitutable to Lufthansa SN Airholding flight from Brussels to Frankfurt (COMP/M. 5335 Lufthansa/
SN Airholding)
Cross-price elasticity Price concentration studies Price correlation tests Price differences Shock analysis, etc.
Critical elasticity = estimates of the maximum own-price elasticity of demand that would still make an increase in price profitable.
Sometimes selling a smaller quantity at a higher price would be more profitable than selling a larger quantity at a lower price.
HM could profitably raise prices by proportion t, only if ownprice elasticity is less than critical elasticity < (1+t)/(m+t), where
t proportional rise in price, m current price-cost margin (p-c)/p.
Measuring price elasticity of demand --------------------------------------------------Various variables affect demand of a given product
Prices and availability of other products General price level, disposable income, etc.
elasticity
Already available information (internal documents, market studies)
Quantitative -- econometric analysis of demand reactions following price changes (necessary to have real datas costs, margins) Cross-price elasticity
Cross-price elasticity --------------------------------------------------Measures an impact of price changes of one product on the demand for another product
Percentage change in the demand for product B when there is 1% increase in the price of product A:
AB
= ( qB/qB)/( pA/pA) >0 products are substitutes <0 products are complements
Economic interpretation
=0 products are not in the same market Note: despite own-price elasticity for the product A stated that hypothetical monopolist would not profitably rise price of A in a small but significant way, cross-price elasticity might help to identify the products exercising constraint on A (the closest substitutes) .
--------------------------------------------------Conclusions
Premium and standard beer brands treated as one relevant product market. HoReCa and retail markets -- relevant product markets in the distribution of beer. The relevant geographic market defined as national in scope.
Lessons made
The application of econometric/quantitative techniques to the market definition analysis requires longer time-series data to conduct price correlation tests and market-level or cross-sectional/panel firm-level data to estimate a structural model for Latvian beer market, on the basis of which own- and cross-price elasticities may be obtained and in particular the critical loss test may be implemented. Low-price consumer products (beer) have negligible PEoD (inelastic demand) compared with more expensive ones PEoD is not constant: for cheaper products PEoD tend to vary over time in the long run PEoD will be much higher than in the short run. PE of supply depends on (free) capacities of producers, entry barriers and many other factors determining whether they can react quickly to price increase or not.
--------------------------------------------------Pricing (scanner) data indicated that the notifying parties brands are perceived as the closest competitors in the retail market
Estimations of matrix of demand elasticities for a set of product categories/ individual brands (14 product markets analysed)
For all major brands and private labels in various product categories fresh basic dairy ; fresh flavoured dairy drinks and long-life flavoured dairy drinks Also at higher level of aggregation e.g. across the four fresh basic dairy categories fresh milk, fresh yoghurt, buttermilk and custard in order to determine whether each categorie constitutes a distinct product market from demand side perspective or whether they form part of a wider fresh basic dairy market
Econometric analysis uphold that parties products are closest competitors for all three categories of considered markets
Commitments --------------------------------------------------It was concluded that concentration will lead to significant impediment of effective competition in many product markets Campina and Friesland Foods proposed commitments
"the third commitment proposal including the divestment of the entire fresh dairy business of Friesland Foods in the Netherlands (covering all fresh products); ownership acpects of many products brand names; divestment of Campina's cheese production facility; three elements aiming at ensuring access to raw milk for downstream competitors,etc.
Market test confirmed commitments submitted are sufficient to remove competition concerns identified in markets Commission concluded that market definitions presented in the Decision can be supported by other evidence and can be maintained without the econometric results.
Conclusions --------------------------------------------------Qualitative and quantitative tools may be used for defining markets and assessing elasticities. Their choice depends upon the data availability, purpose of the investigation, budget resources of the competition authority, etc. The quantitative analysis should rather complement the qualitative analysis, without giving any preference to any particular tool. Especially the application of quantitative tools is not always possible. An econometric estimation of own- and cross-price elasticities allthough done sufficiently robustly will not always assure withstanding of judicial scrutinity.
References ----------------------------------------------1. Bishop S. And Walker M., The Economics of EC Competition Law: Concepts, Application and Measurement, University Edition, 2010, Sweet&Maxwell by Thomson Reuters. Carlton D.W., Perloff J.M. Modern Industrial Organization, Second Edition, 1994, Harper Collins College Publishers. Motta M. Competition Policy: Theorie and Practice, 2008, Cambridge University Press. Case No COMP/M.5046 Friesland Foods /Campina (2008), JO C 075 Vol 52 of 31 March 2009.
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