10 markers

Question 1

SSNIP

Answer 1

1. Small but Significant Non-transitory Increase in Prices
   
   1. Used by agencies to define the market power of firms within a market
2. Works by implementing the firm’s own PEd and XEd to test if a 5-10% increase in prices can be sustained for a year given the closest substitutes in the local market
   
   1. PEd is -(dQi/dPi)(Pi/Qi)
   2. XEd is (dQi/dPj)(Pj/Qi)
3. If firm can sustain then the firm is a monopolist and the market is defined, if not then the market definition is wider
4. Issues include defining the market too widely (cellophane fallacy) which can happen where there are no close substitutes and the good is already at a monopolist price

Question 2

Herfindahl-Hirschman Index

Answer 2

1. Used as a measure of market power by the US DoJ in order to assess any concerns to competition that may arise with a merger (unilateral effects)
2. Calculated by summing the market shares of all firms within the market
3. The EU Commission uses the HHI in decimal form, with a pure monopoly being having HHI = 1. The DoJ uses the % value and so the pure monopoly is 10,000. The symmetric oligopolies are 1/n or 10,000/n, respectively
4. The US horizontal merger guidelines calculate pre and post merger HHI’s in order to find the difference
   
   1. If the post merger HHI > 2500 and dHHI > 100 then there is cause for concern in the market
   2. If post merger 1500 < HHI < 2500 and dHHI>100 then there are potential concerns

Question 3

Coordinated Effects

Answer 3

1. Where a merger is more likely to increase the likelihood of tacit collusion
   
   1. Tacit collusion is where a dominant firm with tacit collusion is a price maker (or leader) and smaller firms with less market power will follow the price, above the competitive price
2. Why wouldn’t a competition agency want this?
3. There is Article 101 to prevent cartels (chapter 1 in the UK) and Merger control prevents coordinated effects
4. An example of where these are used is in the prohibition of the Sains-Asda merger
   
   1. They created a framework for the likelihood of collusion in online retailing

Question 4

Gross Upward Pricing Pressure Index

Answer 4

1. It’s a measure for the magnitude of Unilateral effects caused by a merger. It does this by estimating the increase in firm i’s price-cost ratio (Lerner index) due to a merger
2. Give the formula
   
   1. Break down the formula
   2. diversion_i-j shows the proportion of customers captured by j when i raises its prices. Found with customer surveys
      
      1. diversion is higher between close substitutes
   3. price cost ratio (Lerner index) measures the market power of a firm by testing how much it can price above its marginal cost
   4. price_j/price_i tells us the price ratio of firm j to firm i in terms of a basket of goods
3. Calculate Lerner index by differentiating the pre-merger profit of firm i with respect to price of i
4. Calculate post Lerner index by differentiating profit of i with respect to price of i
5. GUPPI = L^post-L^pre

Was used by the CMA in Sains/Asda

Was controversial because GUPPI was used to decide which markets raised concerns. It was not used as an indicator to identify the potential problem markets

Question 5

Vertical Restraints

Answer 5

1. Clauses included by firms at different levels in the production chain (usually earlier) due to the difference in goals for the firms
   
   1. Retailers want to maximise profit by restricting quantity and raising prices
   2. Wholesalers want the retailer to sell for cheaper so that they sell more and need to purchase more from the wholesaler
2. Tariffs may be included in contracts
   
   1. Linear -explain
   2. Non-linear -explain#
3. Clauses may be:
   
   1. RPM
      
      1. Supplier sets retail price (in extreme) or give retailer range of prices to set from
      2. Blacklisted in Europe with a few exceptions (E.G. book industry)
   2. Ex Territ
      
      1. Retailer can only sell suppliers good in certain areas
         
         1. Stops intrabrand comp.
         2. Incentivises investment in services, increasing the purchasing quality for buyer and raising CS
   3. Ex Dealing
      
      1. The retailer can only supply the good from the supplier - making the supplier a monopolist
         
         1. dampens interbrand comp.
   4. Selective Dist.
      
      1. Manufacturers only allow certain retailers to sell its products
         
         1. e.g. a fashion brand wont be sold at a supermarket
   5. Article 101 used to stop this
      
      1. Not illegal if supplier market share <30%
   6. UK impulse ice creams
      
      1. Outlet exclusivity and freezer exclusivity